The Spanish tax system: the keys to understanding how it works

Spain is one of the countries that welcomes the most foreigners year after year. However, many of them do not fully understand how the country's tax system works. That is why today's article is going to be devoted to getting to know it in depth.

First, it will explain what a tax is and what the three main types are. And then the article will focus on one of these taxes.

What is a tax and what types exist in Spain?

A tax is an economic contribution to which citizens are obliged by law since it supports the state's income and guarantees the operation of the public system of services for general use.

The Spanish tax system distinguishes three types of taxes: fees, special contributions and taxes.

On the one hand, the fees are paid when the citizen makes use of a certain service provided by the state, such as the payment of a permanent parking ford or the renewal of the NIE.

On the other hand, the special contributions are those that have their origin in the receipt of a benefit or an added value by the citizen, such as the increase in the value of a property due to an adjacent urban reform.

And, finally, the taxes that are defined as the payment without consideration made by the citizen as proof that he can contribute to the public administration by reason of an economic capacity resulting from business, property or work. You can find a complete list with all taxes and their percentages here.

With this, a conclusion is obtained: every person who generates sufficient earnings to contribute to the Tax Office, is obliged to do so and does so based on facts that demonstrate his economic capacity.

What are the main taxes you will find in Spain?

Taxes can be classified in various ways: personal and real, subjective and objective, periodic or instantaneous, or direct and indirect. But, without a doubt, the most important are the following:

1. Impuesto sobre las Rentas Físicas (IRPF)

The IRPF is a key piece of the Spanish tax system and its name already reveals some of its essential aspects. It is a tax that is levied on the income that a person receives, because it is what determines their greater or lesser economic comfort and, also, their ability to pay.

Its operation is very simple. The IRPF or Impuesto sobre las Rentas Físicas is a tax that is paid month by month based on a withholding system and, at the end of the year, the annual return makes a balance. In this way, if it is negative, the taxpayer recovers part of what was paid; and if it is positive, you have to pay the difference.

To determine the economic capacity of the taxpayer, various personal and family factors that personalize the tax are taken into account.

2. Impuesto de Sociedades (IS)

The IS is a direct and personal tax that taxes the income of companies and entities. It is applied throughout the Spanish territory, including the Balearic Islands, the Canary Islands, Ceuta and Melilla. Exceptions are the País Vasco and Navarra, which have their own tax.

All types of entities are subject to the IS, as long as they have their own legal personality, from commercial companies to associations and foundations, through cooperatives and sole proprietorships.

The percentage of this tax for is, nowadays, 25%.

3. Impuesto sobre el Valor Añadido (IVA) o Value Added Tax (VAT)

It is a tax created in 1986 by requirement of the European Community and is defined as the basis of the Spanish tax system of indirect taxation because it does not fall on the income that a taxpayer obtains for their work, but on the use that that person makes of their income.

It is regulated in Law 37/1992, commonly known as the VAT Law. Its application excludes the Canary Islands, where the similar Canary Islands General Indirect Tax (IGIC) is applied, as well as Ceuta and Melilla.

Within the VAT there are three tax rates that will depend on the type of service in question. First, 4% (super-reduced rate) for basic necessities.

Second, 10% (reduced rate) for some food and health products, passenger transport, hotels and construction.

And, thirdly, the general rate of 21% if you do not fall into either of the two previous rates.

The resulting amount is reflected in the final product purchased by the consumer. In this way, this tax is neutral for companies, because they do not pay it or collect it, but they do transmit it, thus acting as a collector for the state. For this reason, VAT only taxes the circulation of wealth without stopping to consider personal circumstances as does personal income tax. Companies must declare the VAT paid and collected monthly or quarterly.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes