Madrid: income tax deduction for investments by non-residents

24/02/2023 GDGlobalMobility

Madrid has announced a new deduction in Personal Income Tax for investments made in the Madrid region by new taxpayers from abroad, a measure that is reflected in the Preliminary Draft Law amending the Revised Text of the Legal Provisions of the Community of Madrid on taxes given over by the State.

Investments made in Madrid: percentages and data of interest

As indicated in the aforementioned Preliminary Draft, three out of every four euros that arrive in Spain as investment from abroad do so for projects that are carried out or are based in the Madrid region.

Between 2012 and 2021, the flow of investments doubled with an annual growth of 9.7%. This increase in investment has a great impact on both employment and wealth. In fact, the average annual foreign investment made in Madrid is around 15 billion euros.

Taking into account this scenario in which Madrid is involved, the Community has expressed its interest in:

1 – Maintaining a leading position in the capture of this type of monetary flow
2 – Generating incentives to continue channeling investments in the region.

In this regard, the aforementioned Preliminary Draft includes an important deduction in the IRPF for investments* made in Madrid by new taxpayers from abroad.

* Investments made in addition to the original ones would also generate this right

Personal Income Tax deduction for foreign investors

First of all, it is important to remember that the legal text is still in the Preliminary Draft phase, so it may undergo changes in the Assembly before its official publication.

To date, the Preliminary Draft indicates that natural persons not resident in Spain who move their residence to the Community of Madrid and become personal income tax payers may apply a deduction of 20% of the acquisition value, including the expenses and taxes that accompany the acquisition (excluding, of course, late payment interest that would have been paid by the acquirer) of the following assets:

Real estate.
Securities representing the transfer of their own capital to third parties, traded on organized markets.
Securities representing the transfer of their own capital to third parties, not traded on organized markets.
Securities representing the equity interest of any type of entity, traded on organized markets.
Securities representing the equity interest of any type of entity, not traded on organized markets.

In addition, it is important to note that the 20% deduction is on the regional contribution, not on the state contribution.

Requirements for the deduction to apply

The taxpayer must not have been resident in Spain during the five years prior to the change of residence to Spanish territory that generates the deduction (this measure could also be applied to a Spanish person who returns to Spain).
In the case of real estate, securities representing the transfer to third parties of their own capital issued by Spanish entities and securities representing shares of Spanish entities using their own funds, the investment must be made:

in the year prior to the acquisition of the status of tax residence in Spain;
or in the same year as the acquisition of the status of residence;
or in the following financial year in which the status of residence is acquired.

In the case of acquisition of the rest of the assets, the investment must be made in the financial year of the acquisition of residence or in the following year.
In the case of investment in real estate, this must be located in the Community of Madrid, but the financing can be given at the state level (that is, the financing does not have to be given by a bank in Madrid).
Where the investment is carried out in unlisted securities representing shares of institutions using their own funds, three requirements are necessary:

The entity must not be incorporated or domiciled in a tax haven.
The direct or indirect participation of the taxpayer, together with that held in the same entity by the spouse and relatives up to the second degree, in a straight or collateral line, by consanguinity or affinity, must not exceed 40% of the capital or voting rights of the entity on any day of the six calendar years of maintaining the investment.
The taxpayer must not exercise executive or management functions, or maintain an employment relationship in the entity.

Does the taxpayer need to keep the investment that has been made?

Yes, the taxpayer must keep the investment that has been made for a period of six years, with disposals and reinvestment within one month being valid.

When will this deduction apply?

In general, the deduction would be applied in the year in which the investment occurs or in the following five.

If the acquisition of the real estate or securities representing the transfer to third parties of their own capital issued by Spanish entities or securities representing shares of Spanish entities in their own funds, occurs the year prior to the acquisition of the status of tax residence in Spain, the deduction may be applied in the year in which the tax residence is acquired or in the following five years.

Can the deduction applied be lost?

Yes, loss of residence in the Community of Madrid during the period of obligation to maintain the investment or a breach of the obligation to maintain the investment that has been made, will cause the loss of the deduction that is applied.