Tax residency in Spain for digital nomads can be something you should think about if you fell in love with the Canary Islands. Or maybe, you’re a fan of one of the costas of mainland Spain and that’s the reason you want to spend quite some time in the country.
When you are spending a decent amount of time in a country or you plant flags there, you should always be aware of the tax consequences.
Spain, the basics
A quick rehearsal for those who don’t know, but Spain in situated in south(western) Europe. Apart from mainland Spain with cities like Madrid, Barcelona and Valencia, a lot of people know Spain from its islands.
First you have the Balearic Islands in the Mediterranean Sea. Ibiza is probably the best known. You’ll definitely know it if you’re up for a party. A lot of nomads, however, know the Canary Islands the best as it became a digital nomad hotspot. The Canary Islands are situated in the Atlantic Ocean in front of the coast of Africa, Morocco to be more precise.
Living in Spain
Spain is part of the European Union and the Schengen Area. This means that citizens of other countries who are part of the Schengen Area can freely live in Spain. Know that if you are planning to spend a decent amount of time there, you should register yourself with the local authorities.
If you are not a citizen of a country that is part of the Schengen Area, you will need a visa to stay long-term in Spain. In this respect, it is good to know that Spain recently launched a digital nomad visa.
Tax rules in Spain
If you plan to spend time in Spain, you should know you can be sucked into the Spanish tax system. Therefore, we’ll have a look at the Spanish tax rules and how they affect digital nomads.
Tax residency in Spain
Spain considers you as a Spanish tax resident based upon two criteria.
The first criterium is how many days you spend in the country. If you spend more than 183 days in Spain during a calendar year, you are deemed a Spanish tax resident.
Another way you can become a Spanish tax resident is by having your main base or centre of vital interests there. This criterium is evaluated based upon your factual circumstances like having a bank account or real estate in the country. You’ll see that this evaluation is less straightforward than the days test mentioned before.
So, if you meet one of the aforementioned criteria, the Spanish tax authorities will come to collect taxes from you.
Tax residency in Spain for digital nomads: taxes
Income tax rates in Spain are progressive. They start at 9,5% on the first €12.450 and go up to 24,50% if you earn more than €300.000. However, these are only the federal tax rates. Regional rates should be added to this as they are also competent to levy taxes. This makes that your exact tax burden will differ depending on the region you are living in.
For the Canary Islands, for example, the regional tax rates start at 9% on the first €12.450 and go up to 26% as from an income of €120.000. Basically, this means that your total income tax bill – federal plus regional – can go up as high as 50,50%.
Investment income (dividends, interest & capital gains) is also subject to progressive tax rates. Yet, these differ from the aforementioned rates. Tax rates start at 19% on the first €6.000 and go up to 26% for income above €200.000.
Apart from taxes on income you should also take into account that Spain levies a wealth tax. The wealth tax is imposed by the local authorities. Some local authorities decided to provide a full relief so no actual tax is applicable.
If we go back to the example of the Canary Islands, the default rates are applicable. These start at 0,2% for a net (taxable) wealth of around €167.000. Tax rates go up to 3,50% for people with a wealth over an amount around €10.696.000.
Tax residency in Spain for digital nomads: social contributions
Until 2023, your social benefits depended on the amount of social contributions you paid. You could, to a certain extent, decide how much social contributions you wanted to pay as a self-employed individual
However, as from 2023 your social contributions are linked to your actual income on a yearly basis. Therefore, any decision power on how much social contributions you were paying is eliminated.
Tax residency in Spain for digital nomads
Considering all the above, you’ll share my opinion that Spain is a high tax country. Therefore, it doesn’t make any sense to establish tax residence in Spain for digital nomads voluntarily as part of optimizing your taxes. Nonetheless, if you like Spain and want to spend a good amount of time in the country, there might be no escaping the Spanish tax net. So, before taking such a decision, you should be aware to the tax consequences.
Apart from the aforementioned basics on taxation in Spain, you should know there is a specific regime for people who are staying in Spain based on a digital nomad visa. Under this visa, you can be recognized as a non-resident taxpayer. This would mean your tax rate would ‘only’ be 24%. Yet, you’ll also have to pay social contributions unless you are already covered in another country.
Setting up a company in Spain
It is clear that you pay a high price for tax residency in Spain for digital nomads. Maybe you could lower your tax rate by setting up a company in Spain.
The general corporate tax rate in Spain amounts to 25%. Newly incorporated companies can benefit from a lower tax rate of 15% for the first two years.
After corporate tax, you should also account for withholding tax if you want to take dividends out of the company. The withholding tax rate equals 19%. The actual tax rate will depend on your total income from investments (as mentioned above).
Thus, unfortunately, setting up a company in Spain is no magic solution to lower your tax burden.
You are actually planning to spend a lot of time in Spain, you will be captured by the Spanish tax net. Thus, you will establish tax residency in Spain for digital nomads. This will, however, probably be a lifestyle choice and won’t optimize your tax situation.
If you are looking for the optimal tax structure, I don’t recommend you to set up tax residency in Spain for digital nomads as it will be a very expensive venture. Also working through a Spanish company doesn’t solve the issue of high taxation.