Madrid surprises again with a deduction for investors moving to Madrid

The President of the region of Madrid, Isabel Díaz Ayuso, has announced the implementation of a new regional deduction in the Personal Income Tax (called IRPF). This implementation would be effective even for 2023 if it is approved on time.

This new deduction is intended for any person that: (1) not been tax resident in Spain in the last five years (2) moves to live in the region of Madrid, (3) and invests in any of the following assets:

a) Real estate located in the region of Madrid.

b) Securities representing the transfer to third parties of money, traded or not on organized markets (as could be bonds, loans, etc.). These securities can be issued by both Spanish and foreign entities.

c) Securities representing the stake in the equity of any type of entity, traded or not on organized markets (shares, participations, etc.). This stake can be in both Spanish and foreign entities.

How much is the deduction for investors in Madrid?

This new tax incentive will allow deducting- with a maximum limit of 20% – the amounts invested in the above items, including the expenses and taxes related with the acquisition.

Investments in real estate or securities issued by Spanish entities may be made in the year prior to the acquisition of tax residence in Spain, in the same year, or in the following year. In the case of securities issued by foreign entities, the investment may be made in the year of acquisition of tax residence in Spain or in the following year.

The taxpayer must maintain both her residence in Madrid and the investment for a period of six years. Disposals are allowed in the case of reinvestment in any of the assets mentioned above. Reinvestment needs to be carried out within a maximum period of one month from the date of disposal.

The deduction may be applied in the year in which the tax residence in Spanish territory is acquired or in the five following years.

Is there a limit on the amounts to invest?

The Preliminary Draft of the Law introducing this deduction does not contemplate any quantitative limit on the amounts to be invested, so that these may reach any amount, although only a maximum of 20% of the amount invested may be deducted. For example, in an investment of €100,000, a maximum of €20,000 may be deducted. If the deduction to be applied (€20,000 in our example) is higher than the previous regional tax debt, the excess can be deducted in the five following years (carryforward).

The entry into force of this new deduction increases the tax incentives available to foreigners moving to Spain and, together with the special tax regime -known colloquially as the “Beckham Law”-, reinforces the development of a favorable environment for the attraction of foreign labor and capital in Spain.

Due to the incompatibility in the application of both tax benefits, it will be the specific circumstances of each taxpayer that will determine the convenience of being taxed under one or the other alternative.

At SLNYC we have been advising our foreign clients for years in relation to their tax obligations in Spain, offering them the necessary information to solve their legal and tax doubts and facilitating the decision-making process.