Your guide to taxes in Spain

Public roads, schools, and hospitals don’t pay for themselves. Taxes are the main source of funds that governments have to invest in public infrastructure. Want to learn more about what taxes are, how they began, and how they’re used? Read on for everything you need to know about taxes in Spain.

In early societies, taxes were levied to fund the costs of religious institutions, wars, and basic infrastructure like bridges and canals. While the various ways that taxes are distributed may have changed over time, taxes themselves are certainly here to stay. Let’s discuss the different types of taxes you might come across in Spain today. 

So, what are taxes, really? At the most basic level, taxes are fees that people, organizations, and companies in Spain have to pay to Hacienda and Social Security. They’re one of the most important sources of public funds and their main purpose is to allow the government to manage the country, invest in infrastructure, and provide public services. 

There are an endless number of parameters we can use to group the different types of tax and tax rates. One of the standard groupings is ‘direct tax’ and ‘indirect tax.’

• Direct tax. This tax is taken from people, organizations, and companies. Among this type of tax are personal income tax (IRPF), real estate tax (IBI), and tax on business and professional activities (IAE).
• Indirect tax. Unlike direct tax, this type of tax is applied to goods and services, and the transactions made involving them. It’s called indirect tax because it’s not applied directly to individuals, it’s applied to products and services that taxpayers—in this case, companies—sell. One of the best-known forms of indirect tax is value-added tax or VAT (IVA), but there are others that are commonly applied, too, like the wealth tax and stamp duty (ITP). 

We can also differentiate between taxes according to the tax rate applied:

• Proportional taxes. This kind of tax is calculated using a fixed percentage, like VAT. In this case, the taxable base and the income of the person paying the tax aren’t taken into account.
• Regressive tax. With this kind of tax, the greater your earnings or income, the lower tax percentage you’ll have to pay. A good example of this type of tax is the VAT applied to basic goods, as it disproportionately affects people with lower incomes.
• Progressive tax. The opposite of regressive tax. The greater the earnings or income, the greater the tax percentage. Income tax is one of the best-known forms of progressive tax.

Every state or government has its own tax system, and establishes the taxes it’s going to collect for itself. Overall, however, the purpose of the taxes collected from Spanish citizens is to try and guarantee some level of equality of life among its citizens. 

Spanish corporation tax has fallen from 35% to 25% in recent years, while the EU average has seen an even greater drop of 13.6%—from 35% to 21.4%. This European-level change is mainly due to increased competition between EU member states to attract big businesses and tech giants to establish their headquarters in those countries. It also boils down to some companies sending profits to subsidiaries located in countries with better tax breaks.

Factors such as income, consumption, and wealth all influence how much tax each citizen pays. Just as in almost all countries, Spain distinguishes between direct and indirect tax like VAT—a tax where three different rates apply to the taxable basis or the cost of goods and services. Let’s look more closely at the different types of VAT in Spain:

• Reduced VAT. This 10% tax is applied to products that are for human and animal consumption (except sugary and alcoholic drinks, where the general VAT rate applies). It’s also applied to hotel and catering services, street cleaning service, and transport services.
• Ultra-reduced VAT. At 4%, this VAT rate applies to basic foodstuffs, books, medicine, face masks, and affordable housing. 
• General VAT. A rate of 21% applies to taxable income and the purchase of any goods and services different from those mentioned above.

Another peculiarity of the Spanish indirect tax is the General Indirect Canary Islands Tax (IGIC), which is applied to business operations carried out in the Canary Islands. There’s also tax on production, services and imports (IPSI), used in the autonomous cities of Ceuta and Melilla.

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