Spain's government submits proposals to reform the tax system

The Ministry of Finance has announced a package of tax measures that will be included in the General State Budget for 2023 or in legislation so that they can be fully implemented. As the measures have not been approved yet, changes could still be made. 

The reforms aim to work towards a fairer tax system by providing for a greater contribution from large estates and companies alongside tax reductions for people with low incomes, self-employed workers and small and medium-sized enterprises (SMEs).

Range of tax measures

One of the measures announced to increase the contribution of the wealthy is the so-called "solidarity tax" on large fortunes. This is a temporary tax (for 2023 and 2024) that will be levied on individuals whose assets exceed €3m. The tax rate will be 1.7% for assets between €3m and €5m, 2.1% for assets between €5m and €10m, and 3.5% for assets over €10m. In order to avoid double taxation, taxpayers may deduct from the solidarity tax the amount paid on the wealth tax. 

In addition, the tax rate for capital income tax between €200,000 and €300,000 is increased by one percentage point, to 27%. For income above €300,000, the tax rate rises to 28%.

There are selective discounts for those who have less: income tax is reduced for people earning between €18,000 and €21,000. Additionally, income exempt from personal income tax is increased from €14,000 to €15,000. According to the presentation provided by the ministry, it is estimated that this measure will apply to 50% of workers, as the median wage in Spain is about €21,000.

Likewise, there is an additional reduction in the personal income tax of 5 percentage points in the net return of modules for self-employed workers and the reduction for deductible expenses which are difficult to substantiate under the direct estimation regime is raised from 5% to 7%, with a maximum annual amount of €2,000.

The possibility of offsetting tax losses from subsidiaries within a tax consolidation group in the corporate tax is limited to 50%. This is a provisional measure and allows companies taxed under the tax consolidation regime to be able to defer the possibility of offsetting losses. This is a temporary measure (for 2023 and 2024) that will affect 3,609 large companies.

The nominal rate of the corporate tax will be reduced from 25% to 23% for SMEs with a turnover of up to €1m that are not property-owning entities.

Finally, the value added tax (VAT) on feminine hygiene products – sanitary towels, tampons and panty liners – will be reduced from 10% to 4%. The deduction will apply to condoms and non-medicinal contraceptives.

Bill for 2023

While it was expected that the General State Budget Bill for 2023 would contain the technical structure of most of the measures announced by the government, the Bill does not include the most controversial measure concerning the limitation on the offsetting of losses from subsidiaries within a tax consolidated group.

No details have been made public regarding how the technical structure of the solidarity tax on large fortunes will be developed in the Bill or a draft law.

In addition to most of the measures announced by the Ministry of Finance, the Bill contains other additional measures regarding taxation, which are also relevant.

The Bill provides for the amendment of several articles of the VAT law. It includes an easing of the requirements to recover VAT on bad debts, the amendment of the closing clause (cláusula de cierre) regarding the place of supply rules of services (the effective use clause (cláusula de uso efectivo)) in such a way that the impact of this rule on entrepreneurs or professionals who have the right to VAT deductions is significantly minimised as well as the modification of the regulation of the cases in which the reverse charge mechanism shall be applied. 

New groups have been added to the business tax: Group 848: "Flexible office services, coworking and business centres", Group 864: "Writers and scriptwriters", Group 869: "Other professionals related to artistic and cultural activities not classified in section three", Group 889: "Mountain guides" and Group 034: "Composers, lyricists and arrangers of music".

The Bill also includes new coefficients for calculating the tax base of the tax on increase in urban land value, which local councils will have to take into account.

Osborne Clarke Comment

Although the General State Budget Bill must be submitted to the Spanish Congress for parliamentary discussion, amendment and approval, we must be alert to possible last-minute changes or inclusions.

These measures have prompted a great deal of debate and there is still a high degree of uncertainty surrounding the solidarity tax on large fortunes and the limitation on the offsetting of losses from subsidiaries within a tax consolidated group. This makes it difficult to carry out a technical analysis. Nevertheless, while we are waiting for the publication of the legislation, the question arises whether these measures will fit within Spain's constitutional framework.