The Beckham Law or Special Expats’ Tax Regime (“SETR”), from Spanish Régimen Especial para Trabajadores Desplazados, implies a tax treatment with advantages and disadvantages with respect to the regular Spanish Personal Income Tax (“PIT”) or Impuesto sobre la Renta de las Personas Físicas («IRPF») in Spanish. The differences are mainly related to the applicable tax rates and the income that is taxed, although there are also other aspects to consider. In the next sections we will cover the benefits of the Beckham Law, as well as the disadvantages.
Almost flat tax rates
One of the benefits of the Beckham Law, perhaps the main advantage, is that incomes in the general tax base (employment income, rents, etc.) are taxed at an almost fixed rate. In other words, the first 600,000 euros of income are taxed at 24% and the excess over this amount at 47%. On the contrary, if the SETR were not applicable, it would be taxed at a progressive tax rate that could reach up to almost 50%.
The fact is that the semi-fixed tax rate could be beneficial if the volume of income included in the general tax base is high, but counterproductive if it is low. The reason is that PIT tax rates can even be 0% for low-income taxpayers. As income grows, so do tax rates.
It is not easy to say where the threshold lies between the two regimes, among other reasons because the tax rates applicable with PIT depend on each autonomous community. For example, Madrid has different tax rates than Barcelona. However, and only to give a general idea, the threshold is usually between 50,000 and 60,000 euros of income (in the general tax base). In other words, it is generally better to choose PIT if you receive income below these amounts, while the SETR would be better if you received higher income. If you have any doubts, analyse your specific case.
In addition to the general tax base, there is also the savings tax base. The latter includes various types of income such as dividends, interest or capital gains obtained from the transfer of assets (real estate, shares, etc.). These incomes are taxed at the same rates regardless of whether SETR or Pit is applied, i.e. with a progressive tax rate of 19% to 26%.
Only income obtained in Spain is taxed, except for employment income, where income obtained abroad is also taxed in Spain
If you were applying regular PIT, you would pay taxes in Spain for all your worldwide income. Precisely one of the benefits of the Beckham Law is that only local income is taxed, that is to say, income obtained in Spain. There is only one exception to this last rule, employment income. With the SETR, your worldwide employment income is taxed in Spain. This does not necessarily mean that you will pay income tax twice for the same income (in the country where you generated the income and in Spain). This is because there is a mechanism to avoid double taxation whereby the amount of taxes paid abroad can, in certain circumstances, be used as a tax credit in Spain.
The good thing about SETR is that you would not have to pay taxes in Spain on other income generated abroad, such as rental income, dividends, interest, capital gains, etc. You would only have to pay taxes on those types of income in the country in which they are generated, if any, but not in Spain.
Wealth tax only for assets located in Spain
Another of the benefits of the Beckham Law is that you would only have to pay wealth tax in Spain, if applicable, on assets located in Spain. If you were subject to PIT like any other tax resident in Spain, then you would have to pay, if applicable, Wealth Tax on all your assets, regardless of whether they are in Spain or not.
As you know, the Wealth Tax is a tax paid on the net value of your assets (real estate, stocks and other securities, money in current accounts, life insurance, etc.). This type of tax is not so widespread around the world, but Spain is one of the countries where it exists. It is a progressive tax, that is, the greater the wealth, the higher the tax rate. Depending on the autonomous community of residence, the tax rate can reach 3.75%.
There is no obligation to file the Form 720, an annual information declaration on assets held abroad
This does not affect your tax burden, but it is one of the benefits of the Beckham Law. The point is that if the SETR is applied instead of the regular PIT, there is no obligation to file the informative declaration of assets abroad. This obligation is met by filing the Form 720.
The Spanish government introduced the Form 720 in 2012, in an effort to reduce international tax evasion practices. The form must be filed annually by all tax residents in Spain who have assets located abroad. Specifically for those whose assets are valued at more than 50,000 euros for each type of asset. In other words, more than €50,000 in real estate, more than €50,000 in shares, etc..
It is just an informative statement, which means that no amount would result. However, if the form is not filed, or is filed incorrectly, the penalties can be significant. Add to this the considerable degree of detail required in the form and, therefore, the significant workload involved each year. It is for all of the above that the Form 720 becomes a relevant aspect to take into account when making your decision about the SETR.
Almost flat tax rates
Yes, “Almost flat tax rates” appears in both sections, Pros and Cons. This is because, as mentioned above, the applicable tax rates depend on the income received. Therefore, in some cases better the SETR and in others the IRPF. In any case, to avoid being repetitive, please refer to the Pros section to learn more about this aspect.
Limitation of PIT tax benefits
There is another disadvantage of being taxed as a non-resident. Being taxed as a non-resident implies that the tax quote is calculated in accordance with the Non-Resident Income Tax Act instead of the standard PIT rules. As a consequence of the foregoing, not all the tax benefits provided for regular PIT are applicable. There are many tax benefits, depending on the circumstances of the taxpayer. Below is a list of some of the most common tax benefits:
- Exemption from the deemed income attributed to the permanent residence (if you are the owner);
- Tax benefits if you live with minor children and/or elder parents;
- Tax reliefs if you receive home rental income;
- Tax deductions in the case of physical or mental disability.
There are some Double Taxation Agreements (depending on the country) that are not compatible with the SETR.
A Double Taxation Agreement (“DTA”) is a treaty signed between two countries that establishes some rules to avoid or reduce double taxation (tax on the same income in both countries).
The SETR allows you to apply for a Certificate of Tax Residence in Spain, which is the way to prove in other countries that you are a tax resident in Spain. In fact, you will need this certificate to request the tax benefits provided in a specific DTA.
However, some DTA’s (such as the one between the United Kingdom and Spain) specifically exclude the application of their provisions when the taxpayer applies the SETR. This could have significant consequences depending on your circumstances (what type of income you obtain and where you generate it), and in the worst case scenario may be taxed twice for the same income. This should therefore be analyzed on a case-by-case basis to determine its concrete consequences.
All employment income is taxed in Spain, without the possibility of applying the “7p “tax benefit
One of the advantages of PIT is that, if a series of requirements are met, employment income obtained abroad (for example, because you are assigned a month to another country) could be exempt of taxation in Spain. The requirements are quite strict. For example, that the work is carried out for a foreign company, that there is equivalent PIT in that country, that the work is actually carried out abroad, etc. However, this possibility does not exist directly if the SETR is applied.
How to make sure that the Beckham Law is more beneficial than the regular Personal Income Tax
Depending on your circumstances, the analysis to determine whether the SETR is more beneficial than the PIT can be relatively complex.