The main tax measures included in Law 11/2020, on December 30th, of the General Budget of the Spanish State for 2021
On December 31st 2020, the Official State Gazette of Spain (Boletín Oficial del Estado) published the Law of the General Budget of the Spanish State (from now on LPGEE, for Ley del Presupuesto General del Estado Español) for the year 2021, that came into force on the 1st of January 2021, and that presents the introduction of important tax measures.
Thus, the project of general budget for 2021 that has been promoted by the Spanish Government incorporates a significant increase in fiscal pressure, unlike the Andorran situation, which, despite the crisis caused by the health emergency due to Covid-19, has not increased taxes, placing Andorra as one of the most competitive countries from a fiscal point of view. This is why Andorra can still assume being a very competitive country, comparing to the rest of the surrounding countries. In the comparison of the different tax figures, Andorra is still today a country even more competitive for carrying out any business activity. Keep in mind that the Corporation Tax rate is 10%, with tax deductions for certain sectors that further reduce the nominal tax rate. Likewise, the Andorran personal income tax remains much lower than in most European countries. Incomes of less than 24.000 euros are exonerated. From this figure, the rate rises accordingly with the income to reach a maximum rate of 10%, being considerably lower than in other European countries. In Spain for example, the personal income tax rate is based on the State rate and the autonomous community rate. In this case, in Catalonia, due to the introduction of the new tax actions through the aforementioned LGPEE, the maximum rate of the personal income tax is now 50%.
Therefore, due to the new fiscal changes in Spain, in the present article we will briefly set out the main tax innovations introduced by the LGPEE for 2021.
Personal Income Tax (IRPF).
Increase in rates for the highest incomes.
The LPGEE increases personal income tax rates that will affect the personal income tax return for the 2021 financial year that will be presented in 2022.
Therefore, with respect to the general taxable base, a new tranche is included for incomes over 300.000 euros, increasing by two percentage points the maximum rate that goes from 22,5% to 24,5%, as exposed in the following table:
General taxable base
Rest General taxable base
from now on
(*) Amendment of the article 63 of the Law 35/2006, on November 28th, of the personal Income Tax.
However, it should be recalled that in order to determine the general taxable base, the autonomous community of residence tax rate should be added to this State tax rate.
On the other hand, with regard to the taxable base of savings, another additional tranche is introduced in the rates, as exposed in the following table:
Taxable base of savings
Rest Taxable base of savings
from now on
(*) Amendment of the article 66 of the Law 35/2006, on November 28th, of the personal Income Tax.
Regarding the scales applicable to displaced workers in Spain (also known as the inpatriate’s regime), the applicable rate rises from 45% to 47% when the remunerations exceed the amount of 600.000.-€.
Limits of reduction in the taxable base of contributions to social security systems.
The quantitative limits of reduction to the general tax base of personal income tax are modified for the contributions to social security systems (pension plans, social security mutual previsions, insured pension plans, business social security plans and dependency or severe dependency insurance) going from 8.000 euros per year to 2.000 euros per year.
As a novelty, the resulting limit will be increased by 8.000 euros (up to a maximum of 10.000 euros per year), when the increase comes from business contributions. The reduction limit for taxpayers ‘contributions to social security systems in favour of the spouse who has no income from work or economic activity or that has income of less than 8.000 euros per year is also reduced from 2.500 euros per year to 1.000 euros per year.
Regarding the financial limit of contributions to social security systems, the maximum annual amount of business contributions is reduced from 8.000 euros per year to 2.000 euros per year, increased by 8.000 euros per year when this increase comes from business contributions.
Non-Resident Income Tax (IRNR).
It is now established that all the States of the European Economic Area, and not only the members of the European Union as it used to be, can benefit from the exoneration for interest and other incomes obtained by the sale to third parties of capital equity.
Corporation Tax (IS).
Limitation of the exoneration on dividends and on positive incomes derived from the transfer of securities representing the equity of resident and non-resident entities in the Spanish territory.
For tax periods starting from the 1st of January 2021, the exoneration is reduced from 100% to 95% on dividends and capital gains, if there is a participation of at least 5% in both resident and non-resident entities.
In that sense, the LPGEE abolishes the exoneration on dividends and capital gains when the acquisition value exceeds 20 million euros, maintaining, as the only essential condition for the application of the reduced exoneration of 95%, the percentage of participation of at least 5% of the capital or capital equity of the entity.
Notwithstanding, the reduction of the exoneration will not be applicable, and thus, the full exoneration of 100% will be maintained, when a series of very specific and rigorous circumstances concur, which implies that its practical application will be very scarce. Therefore, as indicated in the explanatory memorandum of the LGPEE, the entity receiving the dividend must meet the following requirements: a) it must have a net turnover of less than 40 million euros in the previous tax period; b) the entity receiving the dividend shall not be classified as a patrimonial entity; c) prior to the incorporation of the participated entity, the entity receiving the dividends must not be part of a commercial group, nor be the holder of more than 5% in the capital or in the equity of any other entity; and d) finally, the entity may apply for the full exoneration provided that the income it receives comes from entities incorporated after the 1st of January 2021. Thus, the full application of the exoneration on dividends will be approved for the three tax periods immediately following the incorporation of the participated entity.
Wealth Tax (IP).
The main amendment introduced by the LPGEE affects the State tax scale. The tax rate for the last tranche of taxable bases being superior to 10.695.996,06 euros is increased by one percentage point, so that the applicable tax rate goes from 2,5% to 3,5%.
In conclusion, all these new tax actions are aimed to increase the Spanish State incomes by creating new tax rates and eliminating or reducing the tax exonerations and reductions, such as the limitation for the exoneration on dividends and capital gains from national and foreign sources. Notwithstanding, in Andorra the full exoneration on dividends, on profit participations and on incomes derived from the transfer of participation in other entities, when the participated entity is subject to an income tax with similar characteristics to the Corporation tax of the Principality of Andorra, and when the percentage of participation, direct or indirect, in the share capital, capital equity or net equity or voting rights of the resident or non-resident tax entity is equal or greater than 5%. Undoubtedly, the requirements for the application of the exoneration on dividends and capital gain are much more lax than the ones in Spain that make it practically impossible to apply for the full exoneration with the new tax regulations.
All in all, they make Andorra a privileged destination for foreign investors attracted by legal certainty and which, with a fully approved International tax framework and in line with the EU and OECD guidelines, offers multiple tax advantages. Moreover, in recent years, Andorra has become an undisputed pole of attraction for investors, entrepreneurs and professionals who wish to pursue an economic activity in the Principality thanks to its tax System, and one of the most competitive in the world according to the latest study elaborated by the World Bank.
For any additional question or clarification, do not hesitate to contact our Tax Department.
Augé Legal & Fiscal