Spanish Direct Taxes: Personal Income, Corporate, and Economic Activity

Personal Income Tax (PIT) in Spain

The Personal Income Tax (PIT) in Spain is a direct, progressive, and personal tax levied on the income of individuals. Taxable income is generally categorized into five main types:

• Employment Income: Income derived from work or employment.
• Real Estate Income: Returns generated from real estate properties.
• Investment Income: Income from capital, such as dividends from stocks or other business investments.
• Income from Economic Activities: Earnings from self-employment or business operations.
• Capital Gains and Losses: Profits or losses from the sale of assets.

Assessment Schemes for Business Income

When a taxpayer operates a business, such as an individual employer, the profits from these activities must be included in their PIT tax return. The assessment of business income can follow one of two schemes:

Direct Estimation Scheme

Under the direct estimation scheme, taxpayers calculate their business profit by subtracting all necessary expenses incurred to obtain that income. This method requires maintaining proper accounting records.

Objective Assessment Scheme

The objective assessment scheme determines business income based on the nature of the activities and measurable objective parameters. These parameters can include the volume of transactions, the number of workers, the amount of purchases, the operational area, or the fixed assets used.

Corporate Income Tax (IS) in Spain

Corporate Income Tax (IS) is a direct and personal tax levied on companies and other legal entities. The taxable event for IS is the acquisition of income by a taxpayer that possesses its own legal personality.

Taxable income comprises the sum of all income, gains, and decreases in equity. Taxable returns are calculated as the difference between income and the expenditures required to obtain it, along with any increases and decreases in patrimony.

The general tax rate for Corporate Income Tax is 35%, although specific rates may apply depending on the sector to which the taxpayer belongs. Since 1996, Small and Medium-sized Enterprises (SMEs) have benefited from a reduced tax rate of 30% on a tax base up to €90,151.82.

The scope of Corporate Income Tax covers all Spanish territory, and the standard tax period runs from January 1st to December 31st.

Tax on Economic Activity (IAE) in Spain

The Tax on Economic Activity (IAE) is a municipal tax, meaning it is collected by local councils. It is a direct, nationwide, and real tax, specifically aimed at regulating the exercise of business, professional, or artistic activities within Spanish territory.

IAE rates depend on the specific activities undertaken and are allocated according to various factors, such as electrical power consumption, the number of workers, or the surface area of the business premises.

Until 2002, it was mandatory for companies to pay the IAE to commence business operations. However, starting in 2003, the law introduced an exemption for companies with an annual turnover of less than one million euros. Consequently, most companies are now exempt from paying this tax.

Additionally, companies are exempt from IAE during their first year of operation and receive a 50% reduction on the tax for the subsequent five years.