Global Mobility Tax

Spain | Mbappé law versus Beckham law

Summary

Last week, the law was finally passed to create a 20% deduction in the regional portion of the Personal Income Tax (IRPF) for non-residents in Spain who establish their fiscal residence in the Community of Madrid and make certain investments (Mbappé Law).

From this idea arises the importance of analyzing each case to determine what is more beneficial for the taxpayer: the inpatriate regime or the new investment deduction.

The detail

Mbappé law

Last week, the law was finally passed to create a 20% deduction in the regional portion of the Personal Income Tax for non-residents in Spain who establish their tax residence in the Community of Madrid and make certain investments (Mbappé Law).

Although it was approved on November 20 and published on November 28, this regulation will be applicable starting January 1, 2025.

Beyond the goals pursued by the law, such as adherence to the principles of transparency, efficiency, budgetary stability, and financial sustainability, the purpose of this law is to summarize the content of the new deduction, explain its incompatibility with the special regime outlined in Article 93 of the Personal Income Tax Law (Beckham Law), and simplify the choice between both regimes.

Requirement for tax residence: Not having been a tax resident in Spain during the five years prior to the change of residence and maintaining residence until the last fiscal year required for the investment’s permanence (6 years).

Content: Deduction in the regional portion of the Personal Income Tax (IRPF) (Form 100). The deduction in the regional portion, both from the general tax base and the savings tax base, will be 20% of the invested amounts.

Investments: Assets that generate the right to the deduction. Representative securities of the transfer of own capital to third parties, whether traded or not, in organized markets; that is, public debt and private debt.

Securities representing participation in the equity of any type of entity, whether traded or not, in organized markets; that is, shares or participations in any entity or investment funds.

Investments in real estate, entities in tax havens, and entities in which the taxpayer holds, directly or indirectly, more than 40% of the share capital are excluded.

Investment timing: The investment must be made in the first year of tax residence in the Community of Madrid or the following year, and in the case of investments in Spanish entities, investments made in the year prior to acquiring tax residence in Spain are also accepted.

Timing of the deduction: The deduction can be applied in the year the investment is made, as well as in the following five consecutive years if there is not enough tax liability.

Investment maintenance: The investment must be held for 6 years, with the possibility of disinvestment and reinvestment within a one-month period.

It is a deduction, not a special regime. Therefore, the regulation does not require an initial application or any administrative action by the taxpayer.

Example: A resident abroad who establishes his tax residence in Spain, in the Community of Madrid. In their first year, they make an investment of €1,000,000 in shares of a Spanish entity. This generates a deduction of €200,000 to be applied to the regional portion of the tax for that year and the next 5 years in their Personal Income Tax (IRPF) return (Form 100).

Beckham law

Article 93 of the Personal Income Tax Law (IRPF) regulates the special regime for displaced workers, also known as the inpatriate regime or Law Beckham.

This law, in effect since 2004, was amended as of January 1, 2023, to reduce the non-residence period to five years and expand the groups eligible for this special regime: employees, managers, digital nomads, researchers, professors, entrepreneurs, family members, etc.

Applying for this special regime means being taxed in a way that, although initially (in 2004) it was like that of a non-resident, today it is a “tertium genus,” a hybrid between taxation under the Personal Income Tax (IRPF) and the Non-Residents Income Tax (IRNR).

The most notable feature is the option to pay tax on employment income at a flat rate of 24% (for the first €600,000, and 47% for the remainder) during the first 6 years of residence in Spain.

Under this regime, the only applicable deductions are those for donations, double taxation relief, and the payments made on account of the Non-Residents Income Tax (IRNR) (withholdings and advance payments).

Meaning, the other deductions, whether state or regional, are not applicable.

From this idea arises the importance of analyzing each case to determine what is more beneficial for the taxpayer: the inpatriate regime or the new investment deduction.

Mbappé law versus Beckham law

A comparative analysis of tax savings should weigh the following amounts:

• The savings from the differential effective tax rate between the special regime (24%) and the progressive tax rate of the general regime (up to 44% on the first €600,000).
• The potential deduction of 20% on the tax due for financial investments made. However, there are other considerations to take into account:

1. Professional athletesThe special regime under Article 93 of the Personal Income Tax Law (IRPF) does not apply to professional athletes.However, the investment deduction can benefit professional athletes who acquire tax residence in the Community of Madrid, hence the name of this law, the Mbappé Law.
2. Reason for relocationThe special regime requires a reason for the relocation (work, professional, family, etc.). Without this reason, one cannot opt for the special regime. In contrast, the regional deduction does not require a reason for the relocation, as long as an investment is made.If this requirement is not met, the regional deduction will clearly be more advantageous.For example, this could apply to retired foreign nationals or those returning to Spain after expatriation to retire.
3. Period of Stay in SpainThe special regime is applicable during the years in which the taxpayer is a tax resident, with a maximum limit of 6 years, but it does not require a minimum period, unlike the regional deduction.The investment deduction requires maintaining tax residence in the Community of Madrid for 6 years.For individuals in global mobility (inpatriates) who are uncertain about their length of stay in Spain, they should opt for the special regime under Article 93 of the Personal Income Tax Law (IRPF).
4. Minimum IncomeThe special regime is “advantageous” when the taxpayer’s income exceeds approximately €60,000, as beyond this general taxable base, the average tax rate exceeds 24% (the fixed rate applied under the Beckham Law).The investment deduction does not require a minimum income for its application, and it will apply to both the general base and the savings base.
5. Other IncomeThe special regime or inpatriate regime excludes foreign-source income from taxation in Spain, except for employment income, and foreign-based assets.The investment deduction or Mbappé Law requires tax residence in Spain under the general regime, meaning taxation on worldwide income and assets.
6. Numerical ComparativeA taxpayer in Madrid with an annual income of €600,000 is taxed at 22.64% (the average state rate, i.e., €135,482) plus 19.73% (the average regional rate, i.e., €118,025), totaling €253,507. They can also deduct 20% of their investments from the regional portion according to the analyzed regulation.Under the special regime, their taxation would be at a flat rate of 24%, meaning €144,000. For income exceeding €600,000 per year, the applicable rate would be 47%.

Conclusion

The incompatibility between these two tax benefits requires an analysis of each case to determine which is more advantageous for the taxpayer, in case they have the option to apply both.

In cases where only one option is available, the decision will be straightforward. However, if both options are possible, they should be analyzed using the points discussed in this VIALTO INFORMS and considering the taxpayer’s personal and financial circumstances.

This should be done at the time of relocation. Remember that the deadline to opt for the Beckham Law is 6 months from the start of the activity.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

José Mª Leis Mayán 
Partner

Further information on Vialto Partners can be found here: www.vialtopartners.com

Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

©2024 Vialto Partners. All Rights Reserved.