Israel – Spain Tax Treaty

Business Activity in Spain

Spain provides a unique opportunity to reach many markets beyond Europe. Spain’s location is a gateway to other markets, including the European Union, North Africa, and Latin America. The unrestricted access that Spain provides to the European market is the opportunity to reach consumers with some of the world’s highest purchasing power.

Spain’s main manufacturing activity is agriculture and food production, with revenues close to €140 billion according to the Spanish minister of industry and tourism.

Spain had the third lowest inflation rate in Europe for March 2023 at 3.1%; that rate decreased to 2.9% in May 2023. Spain has been relatively unaffected by the recent inflation that has plagued much of the world since the pandemic. The trade balances, as registered in 2023, reflect an export/import coverage ratio of 93.5%; whereas the nonenergy trade balance reached a surplus of EUR 137.3 million. Spain’s economy is expected to grow by 2.1% in 2024 and 1.9% in 2025. This growth will be mainly supported by strong domestic demand and a stable job market, in addition to the Recovery and Resilience Plan (RRP) which is expected to help boost investment during this period.

Bilateral Agreements Between Spain and Israel

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Spain regarding the avoidance of double taxation was signed on November 29, 1999, and entered into force on December 31, 2000.

To read the agreement in English click here.

Applicability of the MLI

Both Spain and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.

Israel signed the MLI on the 7^th of June 2017, with its provisions entering into force on the 1st of January 2019. Spain on the other hand, affixed its signature to the MLI on the 7^th of June 2017, and its provisions became effective as of the 1^st of January 2022.

Residency for Tax Purposes in Spain

Residence of an Individual

A person is considered a resident of Spain if they meet any of the following criteria:

• They have spent at least 183 days in Spain during the calendar year.
• Their main economic or business interests are based in Spain.
• Their immediate family (non-separated spouse and minor children) are permanent residents in Spain unless the individual can prove residency in another country. Responsible authorities will resolve the case by mutual agreement.

To learn about how an individual is considered a resident of Israel, click here.

Residency of a Company

A company is a resident in Spain if:

• It has been incorporated in accordance with Spanish law.
• Its registered office is in Spain and/or its effective head office is in Spain.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Spain

Spain Tax Authority is called Agencia Tributaria.

Income Taxation: Personal Income Tax in Spain is levied on two categories: general income and savings income. While the tax rate applicable to general income is calculated as a sum of the tax rates imposed by the state and by the autonomous regions, the savings income is taxed in a range between 19%-28%.

Taxation of Companies and Branches: 25%

VAT: 21%

Capital Gains Tax: 19% and 28%

Withholding Tax

Inheritance Tax and Estate Tax in Spain

Spanish gift and inheritance tax applies to assets and rights received by Spanish residents through inheritance or donation. Non-residents are also taxed on assets in Spain that they acquire in the same ways. However, if there is a Double Taxation Treaty (DTT) between Spain and the non-resident’s country, the DTT will determine how the tax is applied. The tax is calculated based on the net value of the assets.

The tax rate depends on three factors: the value of the assets received, the beneficiary’s existing wealth, and their family relationship to the person giving or leaving the assets.

• Residents are taxed on all assets received worldwide, regardless of location.
• Non-residents are taxed only on assets or rights located or exercised in Spain.

Spain’s autonomous regions can adjust certain aspects of the tax, such as the rates or deductions, based on the family relationship between the parties. As a result, tax rates can vary significantly by region. Generally, the inheritance tax rates vary from 7.65% to 34%, though they are subjected to autonomous communities’ amendments.

Relocation

Relocating to Spain can come with economic advantages. Firstly, the country offers a relatively affordable cost of living, providing financial relief and a higher quality of life. Important to note, that Spain’s diverse economy presents numerous job opportunities across sectors such as tourism, technology, and renewable energy, making it appealing to professionals and entrepreneurs.

Additionally, favorable tax policies and EU membership open doors to global markets and encourage foreign investment. Spain’s strategic location in Europe enhances trade prospects, while its commitment to sustainable development attracts socially responsible businesses. Overall, Spain’s economic prospects and cultural richness make it an enticing destination for those seeking growth and prosperity.

Spain’s strategic location at the crossroads of Europe, Africa, and the Americas makes it an exceptionally well-connected country with ease of access to most of the world. Situated at the heart of Europe, Spain offers convenient travel options to neighboring countries and access to a vast market of over 500 million consumers within the European Union.

The country’s well-developed transportation networks, including modern airports and high-speed trains, facilitate efficient travel within Europe and beyond. With numerous flights connecting major Spanish cities to destinations in North, Central, and South America, Spain serves as a vital gateway for most of the world.

Today, around 13,000 affiliated Jews and 50,000 Jewish residents live in Spain, mostly in Madrid, Barcelona, Malaga, and the autonomous cities of Ceuta and Melilla. Federacion de Comunidades Judías de España is the Spanish affiliate of the World Jewish Congress.

Real Estate Taxation in Spain

The real estate tax is levied on owners of properties located in Spain at a percentage of the rateable value of the property depending on the type of property and municipality:

• Urban property – 0.4% to 1.1%
• Rural property – 0.3% to 0.9%
• Special properties – 0.4% to 1.3%

For more information on real estate rental taxation abroad, click here.

Spanish tax regulations include a property transfer tax, which is managed by the autonomous regions that set the tax rates. This tax mostly applies to transactions done by individuals who are not acting as businesses or professionals (and not subject to VAT). Generally, if a transaction is subject to VAT, it won’t be subject to Property Transfer Tax. However, there are exceptions:

• Transfers of property that are exempt from VAT are still subject to Property Transfer Tax.
• The transfer of shares in property companies is usually exempt from both VAT and Property Transfer Tax.

Transfer of Funds from Israel to Spain

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Spain

1. Sole Trader or Sole Proprieto –The business is considered the same as the person running it. They are responsible for any debts incurred by the company.

2. Partnership – A business relationship is formed by two or more people who contribute money and/or other capital. Profits are divided amongst themselves as they have agreed.

3. Public Limited Company or Corporation – A highly structured and regulated stock company. Annual audits are required, and the majority of owners make major decisions. Shareholders are not responsible for the debts incurred by the company.

4. New Enterprise Limited Company – Considered to be a simplified version of the LLC with additional requirements. The name must include a registration number, one of the founder’s names, and the words “Sociedad Limitada Nueva Empresa” or “S.L.N.E.” At the beginning, there are only allowed to be one to five founders or shareholders; new shareholders are permitted to be brought in as long as they are real people, not legal entities.

5. The Worker-Owned Company – A special type of PLC or LLC owned by workers or the public that does not work for the business. Workers must own 51%, and workers that don’t own shares must not work more than 15% of total hours worked each year or not more than 25% if there are less than 25 workers.

Incentive Laws in Spain

The existing framework of incentives in Spain includes exemptions and deductions to avoid both internal and international double taxation, as well as tax credits for research and development (R&D) and technological innovation.

For example, Ceuta and Melilla, two autonomous enclaves, offer corporate income tax credits totaling 50% for companies established and carrying on activities in these regions during a full business cycle.

A 25% tax credit for expenses incurred from R&D activities. If the expenses are higher than the average R&D expenses for the previous two years, the tax credit is 42%for the excess amount.

In addition, the law recognizes a 17% tax credit for R&D staff expenses and 8% for investments made in tangible fixed assets (excluding buildings). A 12% tax credit can be availed of for technological innovation activities.

In addition, Spain offers attractive tax incentives for foreign and domestic film and TV productions. Foreign productions can get a tax rebate of up to 30% at the national level if they spend at least €1 million (€200,000 for animation) in Spain. Regional incentives in the Canary Islands offer up to 50%, and in Navarre up to 35-40%. For Spanish productions, a tax relief of 20% is available for the first €1 million spent, and 18% for the rest, with a maximum rebate of €3 million. In all cases, productions must meet specific cultural and spending requirements to qualify.

Spain Double Tax Treaties: