The complex network of taxation plays a key role in every country’s economic system. The “Impuesto sobre la Renta de las Personas Fsicas,” or IRPF (Personal Income Tax), is a cornerstone of this system in Spain. 

Origins and Evolution

The IRPF, as it stands today, is the outcome of Spain’s efforts to align its tax system with requirement to develop its economy and social equity principles. Historically, Spain, like many nations, struggled to strike the right balance between revenue collection and economic growth stimulation. Over the decades, the Spanish government continuously adjusted the IRPF, aiming for a system that fairly taxes individuals based on their economic capacity.

Example: Consider the hypothetical case of Pedro, a school teacher in Madrid with an annual income of €30,000, and Alejandro, a business tycoon from Valencia, earning €2 million annually. The IRPF ensures both Pedro and Alejandro contribute to the nation’s revenue in a manner proportionate to their earnings.

Comparison: Much like the UK’s Income Tax, the IRPF is a progressive system. In the UK, there are distinct income tax bands, with higher earners paying a larger percentage of their income. Similarly, Spain’s IRPF rates rise with increasing income, ensuring equitable contributions from all citizens.

The regulation and management of IRPF fall primarily under the Spanish tax authority, known as the “Agencia Estatal de Administración Tributaria” (AEAT) or Hacienda.

The primary laws and regulations governing IRPF in Spain are:

• Ley del Impuesto sobre la Renta de las Personas Físicas (LIRPF): This is the main Personal Income Tax Law. It outlines the tax base, rates, reliefs, and deductions applicable to individual taxpayers.
• Reglamento del Impuesto sobre la Renta de las Personas Físicas (approved by the Royal Decree 439/2007 dd. 30.03.2007 – RIRPF): This is the implementing regulation of the LIRPF. It provides detailed rules and clarifications on how the LIRPF should be applied.
• Ley General Tributaria (LGT): This is the General Tax Law that provides the foundational legal framework for the administration and collection of taxes in Spain. While it is not specific to IRPF, it sets out general principles and procedures that apply to all taxes, including IRPF.
• Convenios para evitar la doble imposición: These are Double Taxation Agreements (DTAs) that Spain has with other countries. While not laws in the strict sense, these treaties play a crucial role in determining how Spanish residents are taxed on income sourced from other countries and vice versa.
• Jurisprudencia y Doctrina Administrativa: These are interpretations and rulings from Spanish courts and tax authorities that provide guidance on specific situations or questions related to IRPF.
• Constitutional regulations: The Spanish Constitution of 1978 sets out certain fundamental principles related to taxation, which also influence the application and interpretation of IRPF.

It’s essential to note that Spain has a decentralized system with Autonomous Communities having the power to regulate certain aspects of taxation, including parts of the IRPF. This means that while there’s a common framework at the national level, there might be specific variations or additional regulations at the regional level.

Scope of IRPF (what is taxed and what is not)

Understanding the extent of the IRPF is essential. The tax is imposed in Spain on a variety of income streams, including wages, pensions, rental income, and some types of capital gains. It encompasses an individual’s entire range of economic activity rather than just concentrating on work income.

Example: Imagine Rosa, a retiree in Seville. She receives a pension, rents out her previous home, and occasionally sells artwork. All these income streams – 1) the pension, 2) rental income, and 3) proceeds from her art sales – fall under the net of the IRPF.

Comparison: Similarly, in the UK, the Income Tax considers diverse revenue streams. Whether it’s income from employment, benefits, a pension, or profits from selling assets, the UK system, like Spain’s IRPF, aims for comprehensive taxation.

Regional Nuances

The IRPF in Spain stands out for its capacity to adjust to local differences. There are various autonomous communities in Spain, and each has its own regional administration. Although the IRPF’s basic structure is the same throughout the country, these local governments have the freedom to change some elements, such tax rates.

Example: Catalonia might have slightly different tax rates or deductions compared to Andalusia, based on its specific economic context and regional priorities.

Comparison: This regional adaptability can be likened to the UK’s devolved administrations. Scotland, for instance, has some autonomy in setting its income tax rates, distinct from the rest of the UK.

Closing Thoughts

The IRPF is of paramount importance to Spain’s budget. As one of the primary sources of tax revenue, the Personal Income Tax directly influences Spain’s ability to fund public services, infrastructure projects, and other government expenditures. Its significance is not only financial but also strategic. The way the IRPF is structured and adjusted can impact economic behaviors, employment rates, and overall economic health. Given its substantial contribution to the total tax revenue, any changes or reforms to the IRPF can have cascading effects on Spain’s fiscal landscape and economic stability. In essence, the IRPF is not just a revenue generator but a tool that aids the Spanish government in steering its economic and social policies.

Understanding the IRPF is more than grasping a tax mechanism; it’s about appreciating Spain’s effort to ensure a fair and balanced tax system. As we delve deeper into the specifics in subsequent sections, this foundational knowledge will be key. Whether you’re a native Spaniard or a British expat navigating Spain’s tax waters, a clear grasp of the IRPF provides valuable insights into Spain’s socio-economic landscape.

A British person not residing in Spain might wonder why they would need to be acquainted with IRPF. Here are several reasons why understanding IRPF could be essential:

• Property Ownership in Spain: If a British individual owns property in Spain, even if they don’t live there, they might generate income from it, such as rental income. This income could be subject to IRPF, and the individual would need to file a tax return in Spain.
• Working Remotely for a Spanish Company: With the rise of remote work, it’s possible for a British person to be employed by a Spanish company and work from the UK. Understanding IRPF helps in comprehending the tax implications on their salary or compensation.
• Retirement in Spain: Some British citizens might consider retiring in Spain due to its pleasant climate and lifestyle. Being knowledgeable about IRPF can assist them in planning their finances and understanding their tax obligations once they decide to make the move.
• Business Interests: A British entrepreneur or investor with business interests or investments in Spain might derive personal income from these ventures. This income could be subject to IRPF.
• Temporary Stays: Even if a British person doesn’t permanently reside in Spain, spending a significant part of the year in Spain (typically more than 183 days) could make them tax-resident. In such a case, their global income might be liable for IRPF.
• Estate Planning: If a British individual has assets in Spain, understanding IRPF can be vital for estate planning purposes, ensuring that inheritors aren’t burdened with unexpected tax bills.
• Staying Informed: Tax treaties and bilateral agreements can exist between countries. Being informed about IRPF can help a British individual understand potential double taxation scenarios and how to legally minimize tax liabilities.
• Professional Advice: Lawyers, financial advisors, and tax consultants serving clients with ties to Spain would benefit from understanding IRPF to provide comprehensive advice.

In summary, while a British person not living in Spain might initially feel detached from the concept of IRPF, various scenarios can connect them to Spanish tax obligations. Being informed about IRPF ensures they navigate their financial and legal responsibilities efficiently and effectively.

A British person residing in Spain has several compelling reasons to be knowledgeable about IRPF:

• Tax Residency: Once a person spends more than 183 days in Spain within a calendar year, they are considered a tax resident. This means they are liable to pay taxes on their worldwide income in Spain, which includes adhering to IRPF regulations. Please, note, that there may be additional situations then a person acquires a Spanish tax residence, the number of days per year not being the single factor.
• Personal Earnings: If the British individual is employed in Spain or has any form of personal income, including pensions, they will be subject to IRPF. 
• Understanding their tax obligations helps ensure they are compliant and avoid potential penalties.
• Property Income: Owning property in Spain and generating income from it (like rentals) makes that income subject to IRPF. Even if the property is located outside of Spain, as a tax resident, the income might still be subject to IRPF.
• Business Ventures: British entrepreneurs or self-employed individuals in Spain will need to understand IRPF for both their personal earnings and to ensure they are correctly withholding taxes for any employees they might have.
• Retirement and Pensions: British retirees living in Spain might receive pensions from the UK or other countries. These pensions could be subject to IRPF, and understanding how to declare this income is crucial.
• Investment Income: Income from investments, whether dividends from Spanish companies or capital gains from selling assets, will typically be subject to IRPF.
• Tax Deductions and Credits: A proper understanding of IRPF can also reveal various deductions and credits available to taxpayers. This can lead to significant savings if properly applied.
• Avoiding Double Taxation: Spain and the UK have a double taxation treaty. A British person living in Spain needs to be aware of IRPF to ensure they aren’t taxed twice on the same income and to claim any available reliefs.
• Legal and Financial Decisions: Knowledge of IRPF can be invaluable when making financial decisions, such as selling property, making investments, or changing employment. Being informed can lead to better financial planning and potentially reduced tax liabilities.
• Stay Updated: Tax laws and rates can change. Being familiar with IRPF ensures that the individual remains compliant and benefits from any new provisions or changes in the tax code.

In summary, for a British individual living in Spain, IRPF is not just a distant concept but a tangible aspect of their financial landscape. Understanding it is crucial for legal compliance, informed decision-making, and optimal financial planning.

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Before getting into details, let me stress that we are talking about taxation from the personal income tax (IRPF) point of view. In other words – what tax issues may arise when an employee goes on a business trip and is compensated by their company for the costs of the travel, hotel stay, and additional expenses he can have related to this trip?

Spanish Income Tax (IRPF) lists five major classes of income which are subject to Income tax (it is quite important to distinguish between different classes of income, as they are taxed under different rules):

1. Income from work (Rendimientos del Trabajo)
2. Income from capital (Rendimientos del Capital) – divided in two categories of movable and immovable capital
3. Income from Economic activities (Rendimentos de Actividades Economicas)
4. Capital Gains and Losses (Ganancias y Pérdidas Patrimoniales)
5. Imputed Income (Rentas Impùtadas)

It is very important to understand to which category of income each income source belongs. We will talk about each category of income in separate lectures, but as of today we are interested in the taxation of travel allowances, which are assigned to the category of “Income from Work” (Rendimientos del Trabajo).

Art. 17.1 LIRPF lists different types of income that are categorized as income from work (please follow this link). These include dietas (pernoctas – daily allowances to cover extra expenses due to travel) and payments for travel expenses (asignaciones para gastos de viaje) with the exception of those calculated in accordance with the norms of Art.9 RIPRF.

In other words, both dietas and payments for travel expenses to the employee are considered by the law as part of his income from work and are subject to the usual taxation rules, EXCEPT when they are paid according to the rules and in the limits permitted by law.

These specific rules you can find in Art. 9 of RIPRF – Real Decreto 439/2007.

Let’s keep in mind while we study these rules today, that only allowances paid within the rules and the limits are not taxable, all the rest goes into the person’s taxable income. Again, if it is inside the rules and limits – no taxation for the recipient (employee) as they are considered compensation payments, and also it is advantageous for the employer – as it can deduct it as an expense and not pay the Employer’s social security contributions, which are quite significant and usually stay at the level of 36% of the gross pay.

Also, let’s note one important detail – the limits discussed here are just thresholds for excluding certain allowances from taxation. Companies are not obligated to pay up to the maximum limit and may have varying financial situations, internal policies, or agreements with their employees. Thus, there are situations where they might pay less than the maximum limit or not provide any allowances at all.

An important, but not widely known, clause in the art.9 of RIPRF states that “When travel and living expenses are not specifically compensated by the companies to which they provide their services, taxpayers who obtain work income derived from labor relations of a dependent nature may reduce their income, for the determination of their net income” according to rules which repeat the basic rules with minor changes.

That means, that when travel expenses and subsistence allowances are not compensated by the employer, they can be considered additional deductions when calculating taxpayers’ Net Income from Work.

We need to distinguish between three different types of allowances and expenses related to travel:

1. Travel expenses (gastos de locomoción) – include expenses required for the person to travel to their destination and return back;
2. Accommodation expenses (gastos de estancia) – encompass costs for hotels and other types of accommodation;
3. Subsistence allowance (gastos de manutencion) – represents the compensation provided by the employer for extra expenses incurred for meals while the employee is away from home for business purposes. These allowances consider the additional costs involved in eating out during travel compared to preparing meals at home.

Let’s start with travel expenses (gastos de locomocion). When an employee travels for his work, we can meet two basic situations – when he travels by public transport or by his private car (or a motorcycle).

If a person travels by public transport – all confirmed ticket costs can be compensated without triggering any taxation. So just make sure that you have all supporting documents, and you will be fine.

But what if you travel in your vehicle? The company can pay you compensation for using your vehicle. Starting from July 2023 it is 26 cents per kilometer. Until then it was 19 cents per kilometer and had not changed since 2005.

Apart from that you can compensate in full for the road tolls and parking expenses.

Accommodation expenses (gastos de estancia) – if you pay for the stay away from home for the work purpose your expenses, are justified by an invoice or another equivalent document.

One important caveat, contrary to the treatment of travel expenses and subsistence allowances, in the case if employer does not compensate these costs, employee can not include them into his income tax declaration as an additional deduction.

Subsistence allowance (gastos de manutencion) – the so-called pernocta. There may be two basic situations – an employee goes on a business trip and returns to his home for the night. Technically in this case there is no “pernocta” but the employee can be paid free of charge a compensation of 26.67 euros per day if the trip was in Spain, or 48.08 if it was abroad for extra costs he incurs during his trip. If he returns home, there are no accommodation expenses to compensate.

The second, more widespread situation – an employee goes on a business trip and spends a night in a hotel. In this case, accommodation expenses (hotel stay) are covered in full based on the supplied hotel invoice or an equivalent document. The employee can also receive a subsistence allowance (gastos de manutencion) – with a limit of 53.34 euros per day for trips in Spain and 91.35 euros per day for trip outside of Spain. No need to provide any supporting documents.

But, be careful – the Spanish states set a time limit for tax-free payments of the subsistence allowance and accommodation expenses – if an employee is sent to work continuously outside of his normal residence, such a continuous period can not exceed 9 months.

Spanish states set a time limit for tax-free payments of the subsistence allowance and accommodation expenses – if an employee is sent to work continuously outside of his normal residence, such a continuous period can not exceed 9 months.

Also, there are special rules for certain categories of employees:

1. Truck drivers (or, as the law puts it – drivers of the vehicles, dedicated to transporting merchandise by the roads – do not need to provide any supporting documents for their accommodation expenses up to 15 euros per day while traveling in Spain and up to 25 euros per day abroad. The normal rules of paying subsistence allowances are applied to them.
2. Flight personnel for air companies – if they do not spend overnight on their trip, they can receive a higher subsistence allowance (gastos de manutencion) than other categories of employees – 36.06 for the travel on the Spanish territories and 66.01 if abroad.

SUMMARY:

• Both daily allowance (per diem) and travel allowances paid to employees are considered part of their income from work and are subject to usual taxation rules, except when they adhere to specific rules and limits as outlined in the law.
• To exclude these allowances from taxation, you need to stay inside prescribed limits, conditions, and special rules. There are also special rules for specific categories of employees, such as truck drivers and flight personnel for air companies.
• For hotel stay, tickets paid for public transport, road tolls, and parking fares – there are no limits for compensation, so long as you have confirmation documents like invoices or equivalent. 

Now let’s consider several practical examples.

Example 1. Travel expenses. Meet Jack. He works for a company that sent him for a business trip from Madrid to Valencia. The company paid him 400 euros for travel expenses. On his return, Jack provided the accounting department with two air tickets costing 220 euros. The following depends on company policy. If Jack returns the difference – 180 euros, there is no taxable income. But the company allows Jack to keep the difference, hence there is 180 euros of taxable income, which will be shown in Jack’s tax declaration as income from work.

Now, let’s assume that instead of the plane, Jack traveled in his personal car. The distance between Madrid and Valencia is 300 km. Let’s assume that there were no extra costs like road tolls or parking. How much Jack’s additional taxable income will be?

The answer: distance 300 km x 2 (return trip) x tax-free allowance of 0.26 euro per km = 156.00 euros tax-free. The difference – 244 euros will be treated as Jack’s taxable income from work.

Challenge 1. Now try to figure yourself, will there be a taxable income in the case of Mary, who over the year made 6 trips from Madrid to Barcelona? The company paid her 1 500 euros. The distance between Madrid and Barcelona is 600 km. Assume that Mary used the plane to fly and each return air ticket cost her 200 euros. Will there be any additional taxable income for Mary?

Try to figure out the answer yourself.

The correct answer is 300 euros. Solution: 200 euros per flight x 6 = 1 200 euros. As Mary received 1 500 euros. So the difference of 300 euros will be treated as additional income from work.

Now, what additional taxable income will be if Mary used her private car instead of the plane for travel? Pause the video and try to find the answer yourself.

The correct answer is No taxable income. Solution: 600 km x 2 per each trip x 6 trips x 0.26 euro per km = 1 872 euros. As the difference of 372 euros is not compensated by the company, Mary can deduct it from her net income when filing her tax declaration.

Example 2. Example with daily allowances (per diem). This time Jack is sent by his company from Madrid to Barcelona for a 4-day business trip. He bought air tickets costing 200 euro with a company card. Also, he received 400 euros from a company to cover his extra daily costs wily on the business trip, as the company has an internal policy to pay employees with a 100 euro daily allowance for business trips in Spàin.  After returning Jack does not have any supporting documents for his expenses while traveling to Barcelona. There will be extra taxable income for Jack´s trip to Barcelona?

Answer. Let’s start with Jack buying air tickets with a company credit card. Costs were charged directly to the company and there are no limits for the costs of tickets when traveling using public transport. So no extra income here.

Now let’s turn to the daily allowance: To be tax-free, the daily allowance (per nocta) for traveling in Spain is limited to 53.34 euros per day. As Jack was away for 4 days, it will be 53.34 x 4 = 213.36 nontaxable. As he received 400 euros, that means that 186.64 euros will be taxable and considered es extra income from employment.

Challenge 2. During the month, the company sent Jack for 6 daily trips to meet customers – 3 times in Spain and 3 times abroad. As Jack lives close to the airport, each time he returns home the same day. During these trips he never spent a night away from home. To compensate for his extra costs due to travel, the Company paid him the same daily allowance – 100 euros per day of 600 euros in total. Will there be, if any, extra taxable income for Jack?

Answer. As Jack did not spend any night away from home during these trips, we need to use tax-free limits of 26.67 euros per day for traveling in Spain and 48.08 euros per day for traveling abroad. So the tax-free amount will be: Traveling in Spain: 26.67 * 3 = 80.01euros. For traveling abroad: 48.08 * 3 = 144.24. Or 224.25 euros in total.

As Jack received 600 euros from the company 600 euros, 375.75 should be included in his taxable income from work.

The post How Travel Allowances Are Taxed In Spain? appeared first on Spain Tax System Explained.

It is done in a slightly humorous manner parodying all educational videos from the 1950s and 1960s. We hope it will be useful.

We will be grateful for any feedback.

Enjoy!

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