Spanish entrepreneurs leaving Spain in tax exodus

Spain’s Ministry of Finance announced, on 20 September, that the temporary Solidarity Tax on Large Fortunes for 2023 and 2024 had raised €632 million this year.

The levy, which was introduced by Spain’s leftist coalition government last December to ease the cost of living of ordinary Spaniards amid high inflation, applies to fortunes greater than €3 million and can reach 3.5% depending on individuals’ wealth.

Spain already had a national wealth tax, but regional governments had the power to apply exemptions. Madrid, notably, allowed a 100% exemption. The Solidarity Tax effectively prohibits any regional exemptions.

A total of 12,010 wealthy individuals paid the new tax, representing 0.1% of all taxpayers in Spain, mainly in Madrid but also in Andalusia and Galicia, the ministry said. The additional revenue was “consistent with government forecasts which pointed to a tax collection potential of €1.5 billion euros on large fortunes” when applied to all regions, it said.

“The tax – and the fear that it may be made permanent after 2024 – has already put many entrepreneurs and investors off from moving to Spain and also seems likely to drive existing HNW residents away,” said Sovereign Business Development Assistant Jesús Alberto Martín. “This fear has only increased since Spain’s election in July produced no clear winner and the potential for Prime Minister Pedro Sanchez to form a new government.

“Whereas previously Spanish residents could simply move their region and stay within Spain, we are now seeing increased enquiries from Spanish residents looking at an international change of tax residence, especially to other European member states like Portugal, Cyprus and Malta, to avoid having to pay an additional 2.75% levy on their capital each year.”

“Six out of 10 advisors believe that the Spanish tax system has worsened during the last government, and it’s not just the HNWIs. We are also receiving enquiries from retirees, entrepreneurs, executives, freelancers and digital nomads,” added Martín.

For alternative residence inside the EU, Sovereign recommends, and can also assist with, applications to Portugal, Malta and Cyprus. EU/EEA and Swiss nationals are entitled, under the freedom of movement principle, to live in all these countries for a period of up three months without any conditions or formalities other than holding a valid identity card or passport.

For periods of more than three months, EU nationals and their family members must apply for a registration certificate or permit granting ‘ordinary residence’ by fulfilling at least one of the following conditions: economic self-sufficiency, employment or self-employment, or study purposes.

Portugal

In addition to these residence permits, Portugal offers a special tax regime for Non-Habitual Residents (NHRs) that enables qualifying entrepreneurs, professionals, retirees and HNWIs to enjoy reduced rates of tax on Portuguese-source income, while most foreign-source income is exempt from Portuguese taxation, for 10 years. Foreign pension income received in Portugal is subject to a flat 10% tax rate.

EU nationals will need to meet the criteria for being a tax resident in the year of application. The simplest way of achieving this is to be present in Portugal for more than 183 days. Portuguese-source salary or self-employed income derived from one of the eligible professions, would then be subject to a final flat rate tax of 20%. This is significantly lower than Portugal’s standard tax rate of between 14.5% and 48%.

There is no inheritance tax, gift tax or wealth tax in Portugal for NHRs. Non-Portuguese income in most categories – including self-employed income, real estate income (rentals), capital income (interest and dividends) and capital gains on property – will also be exempt from Portuguese personal income tax if it is taxable in another country.

In addition to the long list of eligible NHR occupations, directors and managers of businesses that promote productive investment in eligible projects that qualify for tax benefits under the Investment Tax Code can also qualify for NHR status.

Malta

The Malta Residence Programme (TRP) entitles EU nationals to obtain a special Malta Tax Status and Maltese residence permit through a minimum investment in property in Malta. A flat rate of 15% tax is charged on foreign income remitted to Malta, with a minimum amount of €15,000 tax payable per annum (income arising in Malta is taxed at a flat rate of 35%). This applies jointly to income from the applicant, his/her spouse, and any dependants. Foreign source income that is not remitted to Malta is not taxed in Malta.

To qualify for the TRP an individual must purchase property costing a minimum of €275,000 (reduced to €220,000 if the property is in Gozo or the south of Malta) or pay a minimum of €9,600 per annum in rent (reduced to €8,750 per annum in Gozo or the south of Malta). There is no minimum day stay requirement, but TRP holders may not reside in any other jurisdiction for more than 183 days per year.

Cyprus

Whilst Cyprus tax residents are subject to tax in Cyprus on their worldwide income, a number of tax benefits are available to tax residents of Cyprus who qualify under the ‘non-domicile’ tax regime. Non-domiciled tax residents are exempted from the Special Defence Contribution (SDC), which means they can enjoy dividend and interest income free of tax, while rental income in Cyprus is only taxable at normal rates.

An individual is generally considered to be tax resident in Cyprus if he/she is present in Cyprus for more than 183 days in a tax year. However, the ’60-day rule’ gives individuals the option to become tax resident after spending only 60 days in Cyprus if they do not reside in any other country for more than 183 days and are not a tax resident in any other country. This provides an incentive to individuals seeking to change their tax residency to Cyprus whilst also spending time in different jurisdictions during the year.

Cyprus imposes low progressive income tax rates, with the first €19.500 being tax exempt. There is no income tax on salaried services rendered outside Cyprus for more than 90 days in a tax year, while income from Cyprus-based employment that exceeds €100,000 per annum enjoys a 50% income tax exemption for 10 years. Overseas pension income is exempt from tax up to €3,420 per year and taxed at only 5% above that amount.

In addition, there is no tax in Cyprus on profits from the disposal of securities, including shares, bonds, options and units in collective investment schemes, no Capital Gains Tax on assets other than immovable property situated in Cyprus, and no wealth, inheritance taxes or gift taxes.