Spain publishes bill on 'solidarity tax on large fortunes'

The text of the new "solidarity tax on large fortunes" was published by Spain's Socialist Parliamentary Group and the Unidas Podemos party on 10 November 2022 through several joint amendments to the bill of law on new temporary taxes on banks and energy companies that is being processed in the Congress of Deputies.

The text proposes the introduction of a solidarity tax in the Spanish tax system with two aims: to increase revenue by demanding increased contributions from taxpayers who have the most significant economic capacity to deal with inflation and the current energy crisis and to harmonise taxation on personal wealth in the different autonomous communities. 

What does it consist of?

The solidarity tax is of a direct and personal nature and is meant to apply throughout the national territory. Its legal regulation refers to the wealth tax legislation regarding taxpayers, valuation of assets, rules of ownership and exemptions. The fundamental difference between the two taxes is that the solidarity tax is only levied on taxpayers with a net wealth above €3 million, which is why it is set as complementary. 

The new tax is supposed to be a temporary measure implemented for the first two tax years after its accrual once it enters into force. Once this period has elapsed, the so-called "review clause" introduced in the text will be activated, allowing the government to evaluate its results to decide whether to maintain or abolish it.

If the law is published before 31 December 2022 as the coalition government intends and because it accrues at that date, the first year of the solidarity tax application would be 2022. The first self-assessment should be submitted between April and June 2023. If it is published later or a later effective date is set, the first year of application would be 2023.

During its two-year enforcement, the solidarity tax will be applied throughout the national territory but except for País Vasco and Navarra (where an special agreement with the central government will be made), and the competence to legislate this tax will not be transferable to the autonomous communities.

Who does it apply to?

The solidarity tax is levied on taxpayers who are also liable for wealth tax; that is, resident individuals, who are taxed on their net wealth worldwide and non-resident individuals, who are taxed on their net wealth in Spain. Non-resident individuals are only obliged to submit a self-assessment tax return if it is payable.

In general terms, taxpayers living outside the European Union must appoint a representative in Spain. This obligation also applies to resident taxpayers who, after the accrual and before filing the self-assessment tax return, are absent from Spain and do not return until after the end of the tax return period.

The text also introduces a proposal to amend the wealth tax law, which has an impact on the solidarity tax. Specifically, it is meant to tax under wealth tax those structures where non-resident individuals hold shares in foreign entities with underlying real estate assets in Spain.

While it is true that numerous double taxation conventions tax indirect ownership of real estate, the current wording of the Spanish wealth tax law does not provide this possibility for non-resident taxpayers. Therefore, this amendment is intended to correct the existing discrimination against resident taxpayers, who are indeed being taxed on structures of this type.

How is it calculated?

The solidarity tax taxable base consists of the taxpayer's net wealth, calculated according to the wealth tax rules. There is a minimum exemption of €700,000, which applies only to resident taxpayers.

There are additional exemptions applying to net wealth on the same terms as provided in the wealth tax law. Thus, for instance, exemptions such as the primary residence (up to €300,000) or the family business are transferred to this tax.

Having calculated a taxable base of more than €3 million, a progressive tax rate applies as follows (rounded figures): 

• 0% up to €3 million of net wealth
• 1.7% between €3 million and €5 million of net wealth
• 2.1% between €5 million and € million of net wealth
• 3.5% for a net wealth of over €10 million

How is it coordinated with personal income, wealth and similar taxes paid abroad?

• Wealth tax. Because of its complementary nature, the text provides that the amount an individual pays in wealth tax (as calculated under the local autonomous community's rules) may be deducted from solidarity tax. This deduction is justified in order to avoid double taxation between solidarity tax and wealth tax. Effectively, this means that solidarity tax will have a greater impact in the autonomous communities where there are 100% tax reliefs in wealth tax, since no deduction will be generated. However, note that the solidarity tax does not apply to wealth below €3 million, while the wealth tax applies to the "first euro" of taxable base. In addition, it is worthwhile examining whether it will also have an impact on autonomous communities applying wealth tax but with maximum marginal rates lower than 3.5% (such as Catalonia or the Balearic Islands), since solidarity tax may act as a top-up tax.
• Personal income tax. For resident taxpayers, the same existing 60% limitation rule between wealth tax and personal income tax will apply to solidarity tax. Therefore, the aggregate final liability for wealth tax, personal income tax and solidarity tax may not exceed the 60% of the personal income tax base. In case of excess, the wealth tax and solidarity tax contributions must be reduced by a maximum amount of 80%. Therefore, by application of this limit, there will always be a minimum taxation of 20% for both taxes.  
• Other taxes paid abroad. According to the published text, the solidarity tax is established without prejudice to the provisions of international tax treaties and conventions. Therefore, resident taxpayers are entitled to international tax deductions as under the terms of the wealth tax regulations. 

Can non-resident taxpayers be Treaty-protected?

As a very general rule, taxpayers will be required to check whether the corresponding double taxation treaty also applies to wealth taxes. In certain cases, wealth taxes or any tax of an identical or similar nature (such as the solidarity tax), are not covered by the corresponding treaty.

In other cases, the treaty does apply to wealth tax (and to identical or similar taxes) and will establish which State is entitled to tax the wealth of a particular individual. For example, under the tax treaty between Spain and Chile, in very general terms, Chile is competent to tax the wealth of a Chilean resident, even if such wealth is located in Spain. This is the case even for real estate, provided such real estate is not directly held (e.g. real estate owned through a company).

What are the practical implications of the tax?

Among others, the aim of the tax is to guarantee, as a minimum rate, that so-called "large fortunes" contribute to support public expenditure effectively and uniformly throughout the Spanish territory in spite of the tax reliefs in wealth tax regulated by the autonomous communities.

According to the information provided by the Spanish Ministry of Finance, the solidarity tax will affect 23,000 taxpayers from whom €1.5 billion is expected to be collected. According to the published text, this amount will finance policies to support the most vulnerable.

Specifically, according to their estimates, only 1.4% of wealth-tax payers will be affected by the 3.5% marginal rate of the solidarity tax. In comparison, 90% of wealth-tax payers will be exempt from the solidarity tax because they do not exceed the threshold of €3 million of net wealth.

Osborne Clarke comment

In the context of current economic uncertainty, the coalition government has sought to process the approval of the solidarity tax by the fast-track route of introducing amendments to a bill of law that is being processed in the Congress of Deputies. However, the government has  omitted the parliamentary process foreseen for this purpose in the Spanish Constitution and the rules of procedure of the chambers of Parliament, thus generating certain signs of unconstitutionality in addition to those arising from the text itself. 

Therefore, according to the published text, one of the purposes of the solidarity tax is to reduce the differences in the taxation of wealth tax arising from the different autonomous communities' rules. To this end, the solidarity tax legal regulation refers to the wealth tax law. This overlap in the articles not only creates double taxation (we are talking about two state taxes exactly levying the same demonstration of economic capacity) but also entails an alteration in the distribution of tax competencies between the central state and the autonomous communities, which, based on the transfer of powers set out in the organic law 8/1980 on the financing of the autonomous communities (we stress, organic law) have decided to subsidise the wealth tax.

We will have to keep an eye on the text and its possible future modifications. However, the approval of the solidarity tax itself is not guaranteed and the impact of the tax should be reviewed on a case-by-case basis to assess possible alternatives and planning opportunities.