Spanish draft budget and other tax measures for 2023

Introduction

After several pre-announcements of tax developments for 2023, the Spanish Cabinet has now passed to the Congress the Draft Central State Budget Bill for 2023 including a number of important tax measures.

At the same time, the Spanish Cabinet announced a number of other tax measures such as limitations on the use of losses for tax groups and a controversial “solidarity” tax (a new form of net wealth tax) for wealthy individuals, which will be implemented by way of separate legislative initiatives. All of them are expected to come into force in 2023, in principle with temporary application during 2023 and 2024.

Draft Budget Bill for 2023

The draft Budget Bill published includes a number of tax measures, some of which are briefly outlined below:

• Changes to Personal Income Tax rates. The most significant change in the Personal Income Tax will be the increase in the rate applicable to savings (e.g. applicable to capital gains, dividends, etc.) from 26% to 27% for income between €200,000 and €300,000. For income above €300,000, the rate will rise to 28%. On the other hand, the minimum exempted threshold will increase from €18,000 to €21,000 per annum, extending the lowest income ranges that will be fully exempted from income tax.

• Reduction of Corporate Income Tax rates for small and medium size companies. The Corporate Income Tax rate will be reduced from 25% to 23% for small and medium-size companies as long as they have a net turnover under €1m.

• Value Added Tax. The draft bill also foresees some relevant measures in relation to Value Added Tax (VAT) such as: (i) easing the requirements for VAT recovery in the case of bad debts, (ii) some amendments to the reverse charge rule and, more importantly, (iii) a limitation to the application of the special effective use and enjoyment rule. With regards to the latter, the changes imply the removal of the application of such rule to business to business (B2B) transactions, with a few exceptions (leasing of transport, financial and insurance services). The rule will be completely removed in relation to supplies of intermediation, telecommunications, radio and television broadcasting, and electronically supplied services.

Limitation the use of tax losses within corporate tax groups

Although the scope of this tax measure is currently unclear given the existing limitations for offsetting tax losses generally, which may amount to 70%, 50% or even 25% depending on the turnover of the relevant companies, the Minister of Finance announced a 50% limitation on offsetting losses of subsidiaries in consolidated groups, as an additional measure to be approved outside the Budget Bill. On the basis of the announcement of the Minister, this measure will be temporary and will impact the 2023 and 2024 tax years.

“Solidarity” tax for high net-worth individuals

Only a few weeks after the announcement of the repeal of the Wealth Tax in Andalucía and the subsequent revival of the long-running and very controversial debate about tax competition between the different Spanish regions (the Autonomous Communities), with Madrid region holding the leadership in this trend, the Spanish government announced its intention to harmonise (upwards) wealth taxation throughout the whole country.

Following this announcement, the Minister of Finance released details of a new “solidarity” tax which would tax the net wealth of individuals exceeding €3m. According to the announcement, the rates will vary between 1.7% for net assets between €3m and €5m, 2.1% for net assets between €5m and €10m, and 3.5% for net assets above € 10m (i.e. same rates as the existing Net Wealth Tax rates approved at Central State level, which apply by default where the relevant regional government has not approved specific rates).

To avoid double taxation with the current Net Wealth Tax in those Autonomous Communities where such tax still applies, the Wealth Tax will be tax deductible from this “solidarity” tax which is also to apply only temporarily, for 2023 and 2024.

Comment

Aside from other wider and more politically oriented measures such as the temporary reduction of VAT rates for gas and electricity, the measures in the draft Budget Bill impacting income taxes for both individuals and corporates and the related extraordinary tax measures designed to raise revenues for the Spanish State and regional governments are the most notable tax changes announced by the Spanish government.

In light of the current uncertain economic environment, it will be important to carefully monitor these tax announcements for 2023 before their final approval in order to anticipate any potential impact and determine any actions that should be taken in response.

In particular, those affected by the new “solidarity” tax for high net-worth individuals with residence in Autonomous Communities with full exemption from Net Wealth Tax (e.g. Madrid and shortly Andalucía) should carefully monitor the scope and impact of this new wealth tax which in principle has been announced to be in place from 1 January 2023 to 31 December 2024. The outcome of any legal appeals which the Madrid and Andalucía regional governments (both with right wing coalition governments) have announced they will bring should the new tax initiative be approved should be also monitored. In short, such appeals would be mainly focused on the grounds that the implementation of the new “solidarity” tax would be in breach of the Spanish Constitution which conceives net wealth tax as a tax for which each Autonomous Community holds the exclusive legislative authority.

On the other hand, from a VAT perspective, some of the amendments proposed in the draft Budget Bill will be hugely welcome, with particular focus on the partial removal of the effective use and enjoyment rule, a special rule which despite being conceived by the VAT Directive as a purely anti-abuse tool, was the subject of much wider implementation in Spain compared to most if not all Member States. This, combined with an aggressive interpretation by the Spanish tax authorities in the recent years, has led to the use of this anti-abuse rule in much wider scenarios which are clearly far from any tax avoidance or fraud scenarios. Although the rule will remain potentially applicable in respect of a range of services, including financial and insurance services, hopefully this legislative initiative will be seen by the tax administration (or at least the courts) as a bell ringing for a proportionate and measured use of this anti-abuse rule.