How to Pay Taxes on Rental Income in Spain as a Resident or Non-Resident

Tax on Rental Income Spain: What Is It?

The local government levies taxes to spend funds on the public good and boost the efficiency of the economy. The national Constitution states that every citizen must contribute to the well-being of the whole population. Regardless of whether you're a Spaniard, a Spanish resident or a foreigner, you're supposed to pay a tax on the income that you get from renting out what you own in this country. Before we start discussing this tax, let's briefly talk about the other ones that are related to it but shouldn't be confused with it.

The first one is VAT. You don't need to pay it if you rent out a house or apartment to an individual who simply lives there. However, if the renter carries out economic activities on your premises, you'll need to pay VAT for it (typically, 21%). Make sure such a renter is registered as a company or a self-employed professional. For instance, you can rent out a commercial property, such as a shop or cafe. Or, a hairdresser might want to cut their clients' hair in a rented apartment. If they both live and provide their services there, the situation will be classified as mixed usage and you'll need to pay VAT nevertheless.

You're allowed to sublet what you own. The term "sublet" means that you rent the property out to someone and they rent it out to a third party. In this case, be ready to pay a VAT of 21%.

If you rent out your property for short-term holiday rentals, you don't have to pay VAT. But if you provide hotel-style services, then, you'll have to pay a VAT of 10%. If you change the linens and towels only before the arrival of a new guest, it's not a hotel-style service. If you change the textiles every week, take custody of your guests' luggage, wash their clothes and provide food for them, then, it's hotel-style.

Let's imagine that you rent out your property most of the time — but for some reason, it remains empty for a certain period. During this period, you don't get your rental income. Nevertheless, it's mandatory to pay the imputed income tax by December, 31. It's 1.1% of the cadastral value of what you own — or 2% if the re-valuation failed to take place in the last 10 taxable periods.

Do you make a living on property rentals and lack other significant sources of income? Then, you'll be subject to a different tax regime: you'll need to pay a tax on property capital income. We won't focus on it in the article, yet you should know that it's not that easy to switch to this regime. It's necessary to get a full-time employment contract for managing what you own and meet several other requirements.

Now, let's switch directly to the tax income rate.

Tax Rate

The amount of this tax depends on your residency. It's flat for Spanish non-residents:

• 19% for individuals who live most time of the year within the EU or EAA
• 24% for the others

If you're a United States resident, be ready to pay 24%. The same refers to owners from China, India, Russia, Africa, the UAE and other territories outside Europe.

For residents, the tax is calculated according to a progressive rate:

Let's imagine that you earned €70,000 on renting out your Spanish apartment. Its price falls within the fifth bracket— but it doesn't mean you should multiply €70,000 by 0,45 to calculate the tax! Since the rate is progressive, the formula will be trickier.

To calculate the part of the income that falls within a specific taxable bracket, deduct the lower threshold of this bracket from its higher threshold. For instance, the calculation for the second bracket will be €20,200 - €12,450 = €7,750.

So, let's count:

1. The limit for the first income bracket x 0,19 = €2,365.5
2. The part of the income that falls within the second taxable bracket * 0,24 = €7,750 * 0,24 = €1,860
3. The part of the income that falls within the third taxable bracket * 0,3 = €15,000 * 0,3 = €4,500
4. The part of the income that falls within the fourth taxable bracket * 0,37 = €24,800 * 0,37 = €9,176
5. The part of the income that falls within the fifth taxable bracket * 0,45 = €10,000 * 0,45 = €4,500
6. €2,365.5 + €1,860 + €4,500 + €9,176 + €4,500 = €22,401.5

If your rental income exceeds €300,000, deduct €300,000 from that sum, multiply the result by 0,47 and add it to the total.

Just to compare: let's imagine that if your income exceeds €60,000, you're supposed to pay a 45% tax without a progressive rate. Then, the amount of the tax for your €70,000 income will be €31,500 and not €22,401.5.

Tax Deductibles

To make the property suitable for rent and attractive for renters, you need to invest funds in it. Spanish law allows you to deduct these expenses from your tax. This offer is valid only for citizens of the EU and EEA.

Here are the expenses that qualify for the deduction:

• Fees that you pay to professionals who help you obey the local laws (such as accountants and notaries)
• Fees for key holders and real estate agents
• Household bills
• Non-state taxes and surcharges
• Security services
• Insurance of the property
• Unpaid rents (the amount of tax is calculated based on the income that you were supposed to receive but not on what you actually received from the renter — and you can deduct what you failed to receive)
• Mortgage interests and loans taken to maintain and improve the property
• Primary maintenance and reparation expenses (but not extensions: if you add a swimming pool to your house, it won't qualify for deduction)
• Depreciation of the property at 3% of the cadastral value

The most generous deduction will take place if you rent out your property to someone who permanently lives there for a long term (not holidays). In this case, you might be able to deduct up to 60% from your tax amount.

The maximum sum that you're allowed to claim as expenses is the amount of your total rental income. Sometimes, your expenses might exceed your income — for instance, if you invest in costly maintenance. Then, you'll have 4 years to deduct the costs.

Deductibles will become possible only after you confirm your expenses with invoices. Quotations won't qualify. Ideally, you should contract a local accountant who is experienced in deductibles. Send your invoices to this professional and they will save you from excessive costs.

To optimize your budget, you may register as a self-employed professional in this country or start a limited liability company. This will enable you to deduct the VAT tax.

How to Calculate the Tax for Non-Residents

Let's use a real-life example to calculate the tax. Imagine that you tick the following boxes:

• Are a resident of a state outside the EU/EEA, which means you have to pay the highest tax rate of 24% fixed
• Get an annual income of €15,000 on your Spanish rentals
• Have the right to deduct €3,600 from your tax base as expenses

Your tax base will be €15,000 - €3,600 = €11,400. The amount of your tax will be €11,400 * 0,24 = €2,736.

Specifics of Taxation for Non-Residents

If you earn money in Spain, you're obliged to pay taxes for your income in this country. The local authorities can't make you pay taxes for the income that you get from abroad if you aren't a resident. To become a resident, you need to spend in this state at least 183 days annually — and then, you'll have to pay here the taxes on the income that you generate abroad.

If you pay taxes in Spain but aren't its resident, your homeland might or might not require you to pay taxes once again in its territory. Many countries sign dual taxation treaties to avoid excessive expenses for expats. For instance, according to the UK-Spain double tax treaty, you won't have to pay the same taxes twice. So please double-check the laws of your homeland in advance.

When and How to Submit the Documents

Spanish residents pay this tax annually. They include it in their overall tax declaration and submit it before June.

Non-residents do it four times per year:

• April 20th
• July 20th
• October 20th
• January 20th

On each of these dates, take into consideration the income that you received in the three previous full months. For instance, in January, you pay the tax for your income in December, November and October.

If you're a non-resident and own several properties, you should declare your income separately for each property. Residents list all their properties in one declaration.

If you co-own a property together with a family member, you both should submit separate tax declarations.

Penalties

If you fail to meet the above-mentioned deadlines, you'll face a penalty: