By Carlo Lorusso and Almudena Soler
Commonly known as “Beckham law,” the Spanish Special Expat Regime is regulated by the Spanish Personal Income Tax Law. According to Article 93, individuals who acquire their tax residence in Spain might choose to be taxed under Spanish Non-Residents Income Tax rules instead of the Personal Income Tax rules for resident individuals, provided that certain conditions are met.
Benefits of the Spanish Special Expat Regime
One of its advantages is the application of a flat tax rate of 24% on employment income for the first EUR 600,000 of salary per year and 47% for the excess. On the other hand, ordinary tax residents are taxed at progressive tax rates (ranging from 19% up to 54%, depending on the region of Spain where the taxpayer is a resident).
Additionally, it must be mentioned that individuals under this Special Expat Regime are only taxed on Spanish-sourced income. Therefore, dividends, interest, and capital gains obtained outside Spain are not taxed. Dividends, interest, and capital gains from Spanish sources are subject to taxation following a scale ranging from 19% to 28%. Regarding the employment income, as of the arrival date, all the salary would be considered Spanish sourced and therefore subject to tax in Spain. To avoid double taxation for employment income derived from days of work abroad, a limited tax credit might be applied.
This Regime is beneficial for Personal Income Tax and Wealth Tax and Solidarity Tax since these individuals are subject to taxation only in relation to the assets they own that are located in Spain (while regular residents are liable for their worldwide assets). Assets located outside of Spain are not taxed.
In addition, these individuals are not required to file the declaration Form 720 on assets located outside Spanish territory (while regular tax residents are subject to this obligation) within the Spanish Tax Office.
The Special Expat Regime has a duration of 6 tax years(the first year in which the taxpayer becomes a resident in Spain and the following five tax years).
Updates from the new Start-up Law
On December 1, 2022, the Spanish Council of Ministers approved the Law for the Promotion of Start-up Ecosystem, better known as the “Start-up Law.” This new Law includes amendments to the requirements to apply for the Special Expat Regime, such as the following ones:
- Not having been a tax resident in Spain during the five tax periods before the arrival in Spain. Therefore, the requirement of non-residence in Spain has been reduced from 10 to 5 tax periods.
- Employees who move to Spain and provide their services remotely as teleworkers for foreign companies may apply for the Special Expat Regime even if the employer does not order the move. Until now, it required a presence of a company in Spain.
- Regardless of their percentage shareholding, directors of start-ups may also benefit from de Special Expat Regime. In the case of companies considered as holding companies, the administrator may not own 25% or more of the company’s share capital.
- Individuals who move to Spain to carry out in Spain an activity qualified as an entrepreneur.
- High-qualified professionals who carry out activities for start-ups or provide training, research, and development activities, the provided salary must represent more than 40% of the total business income.
- Income obtained in Spain for carrying out the activities contained in this new Law should not be classified as obtained through a permanent establishment, except for the latter two circumstances.
Additionally, the new Law allows for the spouse of the taxpayer and their children under 25 years to apply this Special Expat Regime without an employment contract (or without being a director of a Spanish company, etc.).
The Spanish Special Expat Regime may be particularly attractive for wealthy Brazilian individuals who are still actively working and would like to move abroad with their families or are willing to undertake entrepreneurial activities abroad.
Besides benefiting from a flat rate on their employment or entrepreneurial income, such individuals would benefit from zero taxation on their foreign passive income, even if they are paid by an offshore company, trust, or foundation located in a jurisdiction included in the Spanish or European blacklists.
In other words, Brazilian individuals holding offshore structures would not be required to carry out any pre-immigration restructuring with respect to their foreign investments. They would receive dividends, interest, or capital gains from such vehicles free of taxation once they were in Spain.
It is also important to mention that Spain does not impose a tax on donations made by a beneficiary of the Special Expat Regime to foreign residents, provided that the assets donated are situated abroad.
Accordingly, Brazilians moving to Spain may be able to enjoy a double benefit with respect to donations made to their Brazilian family members considering that: (i) such donations would not be taxable in Spain, provided the assets donated are located abroad; and (ii) under current law, donations made by a foreign resident to Brazilian individuals are free from Brazilian tax on Inheritance and Gifts, except if the asset donated is Brazilian immovable property.
It is important for Brazilian individuals moving abroad to inform Brazilian tax authorities that they are leaving the country and should no longer be considered Brazilian tax residents. Unfortunately, many Brazilian individuals leave the country without complying with all formalities prescribed in the legislation and end up in a situation of dual tax residence, with worldwide taxation being due in Brazil and abroad. To avoid issues, Brazilian individuals should: (i) notify the Brazilian tax authorities that they have left the country through an online service (“Comunicação de saída definitiva”); (ii) notify their Brazilian paying sources that they are now foreign residents and should be taxed as such; and (iii) present a final tax return to Brazilian tax authorities whereby they will ascertain and pay any taxes due until their exit date.
It is important to recall that Brazil does not impose an exit tax on its residents. Therefore, Brazilian individuals may have an opportunity to move abroad without triggering relevant taxation in Brazil, especially with respect to their foreign assets. Due to its Special Expat Regime, Spain may be a good destination for those willing to take this route.
Carlo Lorusso is a founding partner of Lorusso & Partners, a Brazilian and Italian lawyer specializing in international tax law and wealth planning.
Almudena Soler is a tax advisor at B Law & Tax (Spain) and a specialist in international taxation and tax advice for individuals.