Madrid votes and regional tax competition

On 4 May 2021 the election to the Madrid Assembly was held, called after the regional chamber was dissolved by a decree of the president dated 10 March. The PP won 65 of the 136 seats, 35 more than in 2019 and four short of the absolute majority of 69; the PSOE and Más Madrid won 24 each, Vox 13 and Unidas Podemos 10, while Ciudadanos was left without representation. It is a political result that each person will judge in their own way; what matters here is what it implies for the taxation of families and businesses.

The tax policy of the autonomous communities is back at the centre of debate: Madrid has lower taxation of its own in some transferred taxes, which fuels discussion on tax competition between territories and on possible harmonisation. For someone with a large estate or planning an inheritance or a gift, these differences are not theoretical: they can mean very different bills.

Which taxes vary between communities

Wealth tax, inheritance and gift tax and the tax on property transfers are transferred to the communities, which may regulate reductions, scales, thresholds and allowances. Madrid applies a 100% allowance on the wealth tax bill and 99% on inheritance and gift tax for spouses and descendants, among other close relatives, which cuts the bill substantially. Other communities, such as Catalonia, have scales and reductions of their own, with different results.

Personal income tax is partly State and partly regional: each community approves its regional scale, and the 2021 Budget Law has also raised the State bracket for the highest incomes. Wealth tax, for its part, is no longer a temporary tax. The result is a tax map with noticeable differences, in which residence determines which rules apply to each person. It is worth checking the state of these rules every year, because the communities amend them frequently.

Residence in fact, not just on paper

Habitual residence in a community is set by legal rules, including where most days of the year are spent, and not just by registration at a town hall; the authorities may ask for proof. In inheritance, what counts is the habitual residence of the deceased, which is that of the community where they stayed most days during the five years before death. That is why a last-minute move, when illness has already set in, rarely solves anything.

The tax agency announced in the guidelines of this year’s control plan that it will pay attention to fictitious changes of residence, and the communities can also check changes. Anyone who moves for tax reasons must be able to prove it with facts: housing, family life, work, spending, social ties and effective presence in the new community.

What to review

Before considering a move, it is worth calculating the expected saving with real figures and comparing it with the personal and professional costs of relocating. Family businesses should also consider the registered office, the location of the activity and the requirements of the family business relief or exemption, which should be kept documented wherever one lives.

And since regional rules can change with each legislature and State rules have just tightened some taxes, it is prudent to plan with a long-term view and specific advice. This information is general in nature and not a recommendation to change residence.

Every community has its own taxation: real, well-documented residence is what decides which one applies.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.