Shorouk Express
In this week’s Inside Spain we look at how the EU is taking Spain to court over a discriminatory tax for non-residents, and how despite the end of the current drought being near, scientists are warning that there are worse ones yet to come.
In recent months, Spain’s targeting of non-residents has made headlines, especially after Prime Minister Pedro Sánchez announced that he will either impose a supertax or completely ban non-resident buyers from outside of the EU as a means of addressing the country’s housing crisis.
Now the European Commission has announced that it will take Spain to the Court of Justice of the European Union for keeping a discriminatory tax for non-resident taxpayers which relates to the taxation of capital gains from the transfer of assets.
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The European Commission believes Spain is violating the principle of free movement of capital by denying non-resident citizens who pay taxes in Spain a possibility that it offers to resident taxpayers.
That’s because Spanish law allows residents in Spain to choose to defer capital gains tax when the payment for the transfer of assets is postponed for more than a year or is paid in instalments over a period exceeding one year. In this case, the tax is paid proportionally as each instalment is received, allowing for a “cash flow benefit” since only the portion of the capital gains corresponding to the payments made is taxed.
In other words, a lower amount of capital gains results in a lower capital gains plusvalía tax rate than if a large bulk profit was made.
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However, in the case of non-residents, the tax is collected in full at the time of the asset transfer, which prevents non-resident taxpayers from deferring payment of the tax, “even if they receive payment in instalments over time.”
Non-residents in Spain pay a non-resident income tax called Impuesto sobre la Renta de no Residentes, or IRNR, which can include property rental income tax, inheritance tax, wealth tax and capital gains tax.
READ MORE: What you need to know about Spain’s non-resident tax
Brussels already opened a case against Spain for this same issue in December 2021 and issued an ultimatum to amend the legislation by May 2024, but Spanish authorities “have maintained that their tax legislation complies with EU law”.
According to the European Commission, this differential tax treatment means that non-residents “face a significant cash-flow disadvantage compared to residents.”
The EC has now given Spain a two-month ultimatum for failing to adapt its rules on withholding tax on capital gains received by non-resident taxpayers to the freedom to provide services.
A London law firm has also recently called Spain’s Beckham Law a “tax trap” for foreigners, taking full page adverts in respected British financial newspapers criticising the special tax regime’s rules as “inconsistent with fundamental European law and human rights”.
In other news, Spain may be nearing the end of a four-year drought, but it can expect such dry spells to become increasingly “frequent and severe” due to global warming, according to a scientific report published on Thursday.
Spain has long faced “semi-permanent water stress” due to its geographic location, admitted the report by climate and oceanography experts from the global Clivar network that studies climate change.
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But while rainfall in recent years has been around average, “higher temperatures have led to greater atmospheric evaporation, causing longer and more intense droughts,” said the report, which reflects scientific consensus on the topic.
At the beginning of this century, Spain experienced “the highest frequency of severe droughts in the last 150 years”, so it can therefore expect “more frequent and severe drought conditions”, the report said.
This in turn will increase the risk of wildfires, which will be “more extreme” and occur over a longer period from June to September when temperatures are warmer.
They will also hurt two key sectors of Spain’s economy, agriculture and tourism.
“Optimal conditions for summer tourism will deteriorate” but will improve “during the intermediate seasons”, something many of us were already expecting.
But it’s still worth cautiously celebrating the national weather agency Aemet’s announcement this week that the drought that has parched fields and prompted water restrictions since 2021 will soon end thanks to all the abundant rainfall we’ve had recently.
The drought has caused a drop in the harvests of cereals, olive oil and wine, and prompted authorities to draw up plans to have fresh water shipped in by boat to Barcelona, Spain’s second-largest city.
