Spain’s Tax Missteps Undermine Competitiveness

Spain’s central government could learn some valuable lessons about sound taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy from its regional governments and other European countries.

The Tax Foundation recently released the 2025 International Tax Competitiveness Index (ITCI). Since 2017, Spain has dropped from 27th to 34th (out of 38 Organisation for Economic Co-operation and Development [OECD] countries) in the ITCI due to multiple tax hikes, new taxes, and weak performances in all five ITCI components. While Spain’s central government is the main driver behind this drop, Spain’s regional governments also play a role in the country’s overall international tax competitiveness.

In Spain’s case, some of the 40 tax policy variables in the ITCI are set by regional governments. Therefore, the Spanish Regional Tax Competitiveness Index (RTCI) complements the ITCI by comparing the 19 Spanish regions on more than 60 variables across five major areas of taxation: individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source, wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary., inheritance taxAn inheritance tax is levied upon the value of inherited assets received by a beneficiary after a decedent’s death. Not to be confused with estate taxes, which are paid by the decedent’s estate based on the size of the total estate before assets are distributed, inheritance taxes are paid by the recipient or heir based on the value of the bequest received., transfer taxes and stamp duties, and other regional taxes.

Spain’s 2025 International Tax Competitiveness Index Score and Ranking by Category

Source: Tax Foundation, 2025 International Tax Competitiveness Index.

Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

Spain scores poorly on corporate tax policy, ranking 33rd, due to several poor policy choices. First, Spain has both a patent boxA patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns. and a credit for research and development (R&D). Sound tax policy treats economic decisions neutrally, neither encouraging nor discouraging one activity over another. Both the patent box and the R&D credit are tax incentives that apply to a specific type of economic activity and can thus distort economic decisions and make the tax system more complex. Second, Spain is one of 12 countries in the OECD that has implemented a digital service tax (DST). Since DSTs tax gross revenues rather than net income, they can lead to high marginal tax rates on businesses that are less profitable. Third, it has a relatively high corporate tax rate of 25 percent (28 percent in Navarra), above the OECD average of 24.2 percent.

Individual Taxes

Spain’s individual tax component also declined from 14th in 2017 to 18th. Spain has one of Europe’s highest top income tax rates. When the Spanish central government increased the general top marginal income tax rate from 45 percent to 49 percent, Madrid approved a general tax cut, setting the overall (central and regional) top marginal income tax rate at 45 percent. Other regions like Andalusia, Castilla-La Mancha, Galicia, and Murcia followed Madrid’s example and cut the top marginal income tax rate to 47 percent, while Castilla and Leon cut it to 46 percent.

However, the tax rate is only one important factor. While most European countries indexed their income tax to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin, the Spanish central government refused to do so. In Spain, as in most European countries, the personal income tax has a progressive structure where tax rates increase as individuals earn higher wages. However, if wages are pushed up by inflation, people may pay higher taxes even if their real earnings have not increased. This is known as bracket creep.

At the regional level, in 2025, only the Canary Islands indexed its income tax to inflation to avoid bracket creep. It also raised the basic tax credit and child tax credit, and increased the generosity of the personal income tax measures to support large families. Additionally, La Rioja is going to approve a legislative proposal to automatically adjust all tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat., as well as personal and family deductions, for inflation. This makes La Rioja the first region in Spain to adopt such an automatic inflation adjustment mechanism.

Consumption Taxes

Spain ranks 18th on the consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or income taxes where all savings are tax-deductible. component. However, less than 50 percent of consumption is covered by the value-added tax (VAT) due to exemptions that complicate the overall system and distort consumer choices. Consumption taxes that exempt certain goods and services from VAT, or tax them at a reduced rate, require higher standard rates to raise sufficient revenue. A broader VAT base could create fiscal space for lowering the overall VAT rate of 21 percent.

Property Taxes

Of the ITCI’s categories, Spain scores the worst on property taxes (ranking 35th). Spain has multiple distortionary taxes, including a tax on real property, a property transfer tax, capital duties, and a financial transaction tax. Additionally, Spain levies a net wealth tax, an inheritance tax, and a gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax.. However, not all regions in Spain levy a net wealth tax. In 2008, when the Spanish central government repealed the net wealth tax and then reintroduced it three years later, Madrid preserved 100 percent relief from the tax. Following the example of Madrid, the regions of Andalusia and Extremadura approved 100 percent relief, while Galicia offered 50 percent relief.

Although most OECD countries have repealed their wealth taxes, Spain’s central government introduced a national temporary solidarity tax on high-net-worth individuals for the tax years 2022 and 2023 (to be collected in 2023 and 2024), with tax rates between 1.7 percent and 3.5 percent. However, since the government made this tax permanent, some of the regions that offered 100 percent relief approved a tax deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe. For individuals, some deductions are available to all taxpayers, while others are reserved only for taxpayers who itemize. For businesses, most business expenses are fully and immediately deductible in the year they occur, but ot for the difference between the regional wealth tax liability and the solidarity wealth tax liability. This allows Andalusia and Madrid to retain the revenues the central government planned to collect while still offering relief to individuals with a net wealth below €3 million. Since 2025, three more regions—Cantabria, La Rioja, and Murcia—have approved the same deduction as Andalucia and Madrid. Extremadura chose not to implement this deduction, allowing the central government to collect any revenue from the residents in Extremadura with net wealth exceeding €3 million. Additionally, the Balearic Islands and the Valencia Community raised the exception threshold to €3 million and €1 million, respectively.

Similar to the net wealth tax, the inheritance and gift taxes in Spain are collected and administered by regional governments. For unrelated or distant heirs, the top inheritance tax rate reaches 87.6 percent (in Asturias). Unsurprisingly, Spanish regions have the highest inheritance tax rates in Europe.

While inheritance and gift taxes collect little revenue, a recent study revealed that inheritances can reduce wealth inequality as transfers are proportionately larger (relative to their pre-inheritance wealth) for households lower in the wealth distribution. And this is especially true for Spain, where inherited wealth as a portion of net wealth reaches 95.6 percent. Therefore, given their limited capacity to collect revenue and negative impact on entrepreneurial activity, saving, and work, policymakers should consider repealing inheritance and gift taxes. However, like the wealth tax, the central government is looking to introduce a new inheritance tax on top of the current one, to eliminate the deductions for close heirs that most regions currently apply.

What Is Next?

Spain should implement principled tax reforms that support economic growth by making the tax code more neutral and competitive.

Under the turmoil following the flash floods in Valencia, the central government introduced a series of amendments to the global minimum tax draft legislation. However, these amendments that raised current taxes had nothing to do with the global minimum tax.

One of the amendments extended the windfall tax on the banking sector, introduced temporarily for 2023 and 2024, for three more years. However, this tax was not designed to tax profitability (windfall or not) since it uses a bank’s net interest income and net fees as the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.. While the previous tax applied a flat rate of 4.8 percent, the new tax rate is progressive, ranging from 1 to 6 percent, and can be partly deducted from the corporate income tax base.

The European Central Bank (ECB) objected to Spain’s windfall tax on banks, as it could reduce credit supply and banks’ resilience in an economic downturn.

Maintaining this Franco-type windfall tax would likely raise interest rates, further hit banks that are already not profitable, distort competition in the banking sector, increase litigation, and punitively target certain industries because the tax base is poorly designed.

Additionally, the tax on capital gains above €300,000 was increased by 2 percentage points to reach 30 percent. While this tax hike will raise little or no revenue, it follows a trend that started in 2019; since then, the top capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. has increased by seven percentage points.

Policymakers should avoid tax hikes and consider repealing windfall, solidarity, and wealth taxes. As public spending, debt, taxes, and transfers to Catalonia increase, Spain’s current economic challenges could turn into a long-term recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years.. Spain should follow Portugal’s lead and use the additional revenue raised during the past years to cut taxes. It should also follow La Rioja’s tax policy and index the income tax with inflation to avoid bracket creep.

To increase its internal and international tax competitiveness, perhaps Spain’s central government should look to its successful regional governments and overseas competitors for ideas.