Spain’s 2014 Tax Reform: Key Implications for Businesses

Spain’s 2014 Tax Reform: Key Implications for Businesses

Spain’s 2014 Tax Reform: Key Implications for Businesses

Spain plans to overhaul its tax system to boost economic growth, make businesses more competitive and create jobs.

The government aims to shift the tax burden from jobs to consumption, while still guaranteeing sufficient tax revenues to reduce the country’s budget deficit. In the last few months, Spain’s economy has begun to recover from a long, employment-destroying recession. But the jobless rate, which stood at 26 percent in the last quarter of 2013, remains a stumbling block to solid growth. A total of 125 proposals have been recommended by a Committee of Experts who have been working on the tax reform project since last summer. The changes are expected to be passed into law later this year and come into effect in 2015.



Changes to personal income tax and VAT account for a large part of Spain’s tax shake-up, but businesses are also affected. The two main changes are:

• A 3 percentage points cut in the amount of social contributions – such as for health and pensions – that companies pay on top of their employees’ salaries.

• A gradual reduction in Spain’s corporate tax rate, currently running at 30 percent.

Lower social contributions combined with a planned hike in consumer taxes will favour Spanish producers over their overseas competitors, who have the same VAT applied to their products in Spain without benefiting from reduced labour costs. The cut in the corporate tax has been a long time coming, as Spain has one of the highest rates in the European Union. Next door neighbour Portugal has already taken steps to lower its corporate tax rate which stood at 31.5 per cent in 2013. Spain’s Committee of Experts has recommended cutting the corporate tax rate to first, 25 per cent in 2015, then later to around 20 per cent. More importantly, it will encourage increased foreign investment in Spain, seen as a key driver for long-term economic growth.



As with any tax reform worth its salt, it’s not all good news. The reduction in corporate tax will be accompanied by the removal of existing tax breaks for businesses which re-invest their profits or earmark funds for R&D. These have permitted most large firms to pay an effective tax rate of less than 5 per cent. Furthermore, a lower tax rate is not beneficial for every company, particularly those with negative tax bases from past years. But the Committee of Experts has proposed that these firms  have the option to maintain the 30 per cent tax rate until all tax losses are offset. So Spain’s tax reform will have its winners and losers. But stepping up the pace of the country’s structural reforms is crucial to securing sustained growth and job creation.

For more information on Spain’s tax reform, contact corporate law firm Argali Abogados.

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