Money talks, but is Spain listening? Unpacking Madrid's tax policy

Spain’s post-pandemic recovery has emerged as a glimmer of positivity while most of Europe has been stuck in the doldrums. Boosted by tourism and a healthy labour market, the country’s economy has grown at an average rate of 3% since the start of 2024. That’s compared to 1% for the wider eurozone.

Despite this success story of recent years, experts are nonetheless sounding the alarm over Spain’s tax system. A labyrinth of inefficient policies, according to critics, risks undermining growth by deterring investors and wealthy individuals. “Spain has one of the most complex tax systems in Europe,” said Cristina Enache, global tax economist at the Tax Foundation. “The central government could learn some valuable lessons about sound tax policy from its regional governments and other European countries.”

Among 38 OECD countries included in the Tax Foundation’s annual Competitiveness Index, Spain has dropped to 34th position. According to Enache, who worked on the index, this is linked to Spain’s poor performance in five key categories. These include corporate income tax, individual taxes, consumption taxes, property taxes, and the international tax system.

In terms of corporate income tax, one of Spain’s downfalls is that it offers both a patent box and an R&D credit to encourage business innovation, said Enache. “It’s good for companies to have only one way to increase research and development,” she explained. A patent box means that businesses pay lower taxes on profits they earn from patented inventions, while the R&D credit is another form of tax relief to reward innovation. While the policies are designed to support companies, critics argue they distort economic decisions and make the tax system more complex.

“One of the concerns that companies have, and in particular big companies in Spain, is that there are multiple taxes,” said Roberta Poza Cid, Deloitte's EU tax policy leader. “There is also a lack of legal certainty over potential changes and a lack of neutrality,” she added, pointing to instances of double taxation. For example, companies in the banking or energy sectors must pay a windfall profits tax on top of corporate income tax.

Another policy affecting businesses is Spain’s Digital Services Tax, a levy on the revenue of companies providing digital services in Spain. European DSTs, primarily targeted at tech giants like Apple and Meta, notably came into the firing line this summer after US President Trump took umbrage with what he dubbed the discrimination of US firms in Europe. In the absence of a concrete international framework on DSTs, which is still in the works, Spain has implemented the tax at a national level. It is one of 12 countries in the OECD to do so. Compared to other nations, Spain’s threshold for taxing revenue is quite low. As it doesn’t tax net income, the DST can also affect less profitable businesses.

Tax competition between regions

When it comes to individual and property taxes, the state is once again making key missteps, according to the Tax Foundation. For the former, Spain ranks 18th out of 38. For the latter, it comes in lowly 35th place. Spain’s central government has set the top marginal income tax rate at 49%, although many regional authorities have decided to make their own cuts to this threshold. “Tax competition between regions is what is keeping Spain from becoming a tax hell,” said Enache. “We can already see many improvements at a regional level,” she explained. “For example, La Rioja is the first region in Spain that just agreed that income tax will be indexed to inflation.”

It would also be an oversight to examine Spain’s tax system without mentioning its wealth levy — collected alongside inheritance taxes, gift taxes, a property transfer tax, and capital duties. Spain is one of only three European countries, alongside Norway and Switzerland, to collect such a levy. “These taxes usually don’t collect much revenue,” said Poza Cid, although “we do see wealthy individuals leaving Spain because of it”. Spain has both a tax on wealth above €700,000, as well as a separate ‘solidarity wealth tax’, applied on those with a net wealth of €3 million, with tax rates between 1.7% and 3.5%. Many regions have decided to set lower rates by offering relief on that baseline.

Redistributive goals

Giulio Allevato, professor of tax law at IE University in Madrid, told Euronews that competition between regional powers is, however, a double-edged sword. “Tax competition in general is a good thing as it leads to efficiency and effectiveness,” he explained. “But there is also the risk that it might turn into a race to the bottom and increase the fragmentation and complexity of the tax system.” According to Allevato, this is playing out on a Europe-wide level as well as at a Spanish level, with nations like Ireland and Luxembourg reaping the benefits of aggressive policies to the detriment of other countries — a practice the OECD is seeking to tackle.

Allevato also argued that the Tax Foundation’s ranking doesn’t pay enough attention to redistributive goals, a key focus of the Spanish system. “This of course might make the ecosystem less attractive for certain types of taxpayers,” he said, “but at the same time it reinforces social cohesion and social equality, and that’s also important for investors deciding whether or not to invest in the country.” While wealth in Spain is still spread unevenly across the population, the nation has a lower level of wealth inequality than many of its European peers.

Although experts may disagree on the effectiveness of certain policies, there is — however — a broad agreement that simplifying the tax system and facilitating compliance should be top priorities. Looking ahead, a major development in the coming years will be the implementation of the OECD’s global minimum tax. A key challenge, according to experts, will be applying it in a way that doesn’t overburden companies. Reducing uncertainty, ensuring even application, and harmonising the policy with national taxes will be crucial.