Madrid: Tax News in 2024

The Official Gazette of the Autonomous Region of Madrid has published on November 28, 2024 Law 4/2024, of November 20, which modifies the consolidated text of the legal provisions of the Autonomous Region of Madrid regarding taxes ceded by the State, approved by Legislative Decree 1/2010, of October 21, of the Governing Council, to establish in the Personal Income Tax a new deduction for investments by new taxpayers from abroad. This new tax credit to be applied to the gross tax due of the personal income tax ("IRPF") applicable in the autonomous region for investments made by new taxpayers relocated from abroad. It will enter into force on January 1, 2024, meaning it will apply to the IRPF for fiscal year 2024.

With the aim of promoting job creation, establishing new companies and growing existing companies, the new tax credit incentivizes the arrival of new foreign investors, enabling them to reduce their IRPF liability on the condition that they invest in certain securities.

Beneficiaries of the tax credit

Those able to benefit from this tax credit will be nonresident individuals who, as of January 1, 2024, become IRPF taxpayers in the autonomous region of Madrid, providing they meet a dual requirement:

• They have not been tax residents in Spain during the five years before the change of residence to the autonomous region of Madrid.
• They maintain their status as IRPF taxpayers in the autonomous region of Madrid until the last year of the holding period of the investment.

Tax credit percentage and eligible investment assets

The tax credit, which will reduce the gross tax due of the IRPF applicable in the autonomous region, is equal to 20% of the acquisition value of the following securities (including expenses and taxes related to the acquisition, but excluding interests):

• Securities representing the assignment to third parties of own capital, whether negotiable or not, on organized markets. These are financial assets representing the raising and use of third-party capital (public debt securities and private debt securities, both listed and unlisted).
• Securities representing holdings in the equity of any type of entity, whether negotiable or not, on organized markets. This second case includes investments in equity securities, as well as shares and holdings representing the units or shares in collective investment undertakings.
  
  In relation to investments in securities representing holdings in the equity of nonlisted entities, the following requirements must be met:
  • The entity must not be incorporated in or domiciled in a tax haven.
  • The direct or indirect shareholding of the taxpayer, together with that of the spouse and relatives up to the second kinship degree, cannot exceed 40% of the capital or voting rights of the entity on any day during the calendar years in which the investment is held.
  • The taxpayer cannot hold executive or managerial duties and cannot have an employment relationship with the entity.

The approved regulation does not establish limitations related to the status of the issuer of the securities or the location of issuance. Therefore, securities issued abroad and securities representing the capital of foreign entities can be considered eligible for investment.

Moreover, no cap is established on the tax credit base or the maximum tax credit amount. This tax credit is, therefore, a tax incentive that can lead to a very significant reduction in the taxpayer's tax burden.

Tax period in which the investment must be made

As a general rule, the investment must be made in the same tax period in which the individual becomes an IRPF taxpayer in the autonomous region of Madrid or in the following tax period.

As a special case, if investments are made in "Spanish securities"—that is, in securities representing the assignment to third parties of own capital issued by Spanish entities or in securities representing holdings in the equity of Spanish entities—it is also permitted to make the investment in the tax period before the one in which the investor becomes an IRPF taxpayer in the autonomous region of Madrid.

Tax period in which the tax credit can be applied

The tax credit may be applied in the tax period in which the investment is made and in the five immediately subsequent tax periods with respect to amounts that remain pending due to insufficient tax liability.

In the case of investments in "Spanish securities" made during the tax period before the tax period in which the individual acquired IRPF taxpayer status in the autonomous region of Madrid, the tax credit may be applied in the following tax period in which tax residence is acquired in Madrid and in the five immediately subsequent tax periods with respect to amounts that remain pending due to insufficient tax liability.

If it clashes with other regional tax credits, the tax credit will be applied after the other regional tax credits to which the taxpayer is entitled have been applied.

Investment holding period requirement

The taxpayer must hold the investments made for six years (this period is understood to be calculated from date to date), allowing for the possibility of transferring the investments for valuable consideration before the end of the mentioned period, under the condition that the entire amount obtained is reinvested in eligible assets within one month from the date of transfer.

In the specific case of investments in "Spanish securities" made in the tax year before acquiring the status of an IRPF taxpayer in Madrid, there is a requirement that the initial investment be held until the acquisition date of tax residence in Madrid, later allowing transfers for valuable consideration subject to the condition of the full reinvestment of the amount in eligible securities within the month following the transfer date.

Loss of an applied tax credit

A tax credit applied will be lost if the taxpayer ceases to be a tax resident in Madrid during the required term and also if the taxpayer does not comply with the required holding period of the investment (including cases of transfer without full reinvestment of the amount).

The approved regulation does not specify how the taxpayers must adjust their tax situation if the tax credit is lost. In the absence of such a legal provision, the adjustment procedure under article 122.2 of Act 58/2003 (the "General Tax Act") would appear to apply. Under this provision, taxpayers must "(...) include, in the self-assessment corresponding to the tax period in which the condition was lost, the tax liability or amount resulting from the exemption, tax credit, or improperly applied tax incentive in the previous tax periods, together with the late payment interest". 

Incompatibility with other regional tax credits and the "impatriate" scheme

For a given investment, the new approved tax credit would be incompatible with the regional tax credits for acquisition of shares or stock in newly or recently created entities and for investments in entities listed on the Alternative Securities Market (Mercado Alternativo Bursátil).

In addition, it should be noted that this tax credit will not be applicable if the taxpayer opts for the special tax scheme applicable to workers, professionals, entrepreneurs, and investors relocated to Spain ("impatriate tax scheme" regulated in article 93 of Act 35/2006, on Personal Income Tax), since taxpayers covered by this special scheme cannot apply regional tax credits to their gross tax due.

Entry into force

The approved regulations provide that they will enter into force on the day after publication in the Official Gazette of the Autonomous Region of Madrid, and that individuals who become IRPF taxpayers in the autonomous region of Madrid from January 1, 2024, can apply this tax credit. This creates a significant retroactive effect for this tax incentive in two ways: (i) investments made in the 2024 tax period on a date before the date of the nonresident's relocation to the autonomous region of Madrid that triggered the acquisition of tax residency in 2024 will qualify as eligible investments; and (ii) investments made in 2023 in "Spanish securities” will qualify as eligible investments if tax residency is obtained in 2024.  

Other issues

Finally, we highlight that the approved amendment only affects IRPF and, consequently, taxpayers benefiting from this new regulation will have to assess, in relation to the mentioned investments, their taxation under Wealth Tax and the Temporary Solidarity Tax on Large Fortunes.