This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.
Taxation in Agriculture
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Chapter 34. Spain
Abstract
34.1. Overview
In Spain there are over 945 000 farm holdings (2016) with an average size of 25 hectares and 96% of the farms were owner-operated businesses (as of 2003). Eighty per cent of the total land area is rural and 50% of the country is used in agriculture employing 4.2% of the labour force.
The agricultural sector has differential tax treatment which, in general, consists of special regimes to facilitate tax administration for small farms. Differences relate to the determination of taxable income which for most farms is calculated on the basis of estimated or national average incomes rather than on the actual incomes. Agriculture is often exempt from regional water use charges but is taxed for discharges of pollution.
In 2015, tax reforms were implemented modifying the main tax laws, i.e. personal income tax, value added tax, corporate tax. The reform aimed to reduce the tax burden on taxpayers, simplify and modernise the main taxes and address tax fraud. Concerning the agricultural sector, the reform did not substantially change tax concessions but did reduce the scope for eligibility for farmers using the estimation method (decreasing the threshold income from below EUR 300 000 to below EUR 250 000).
34.2. Income taxation
Taxable income is classified into the following five categories according to the source or origin: employment income, investment income, business income, capital gains and imputed income. Business income includes profits obtained from agricultural activities.
The following methods are available for the calculation of income:
Direct income calculation (accrual based accounting)
Direct income calculation (simplified using cash based accounting)
Indirect income calculation using fixed index numbers for the calculation of the profit (the estimation method).
The first method is mandatory for farmers with income in the previous year over EUR 250 000. The Spanish income tax law offers all small entrepreneurs, including farmers, the opportunity to simplify their calculation of income by using the second or third options.
Approximately 94% of farmers use the estimation method. The calculation of income is made by multiplying sales by fixed index numbers that vary between 13% and 56% depending on the agricultural production system. These fixed index numbers set by government are exclusive to agricultural activities and estimate the average costs of each production system. All small businesses can use the estimation method applying modalities relevant for their economic activities.
Included in taxable income are sales, agricultural subsidies (with the exception of certain EU CAP subsidies) and other compensation received during the fiscal year. EU CAP subsidies excluded from taxable income include: definitive abandonment of vineyard cultivation; grubbing of apple plantations; grubbing of banana trees; definitive abandonment of milk production; definitive abandonment of pears, peaches and nectarines culture; grubbing of pear, peach and nectarine plantations; definitive abandonment of the cultivation of sugar beet and sugar cane. Many of these subsidies were paid in the past but are no longer granted.
Corrective multipliers are then applied to determine net income taking into account circumstances relating to production i.e. the cost of salaried labour, use of leased arable land, purchases of supplementary feed for livestock, and whether the farm is organic. Given that income from EU CAP subsidies is adjusted by the corrective multiplier the entire subsidy is not included in taxable income.
Under the estimation method a reduction of 25% is applied to the taxable income of young farmers (aged between 18 and 40 years old) for five years following the commencement of their farming businesses.
Bookkeeping obligations for farmers using the estimation method are limited to recording sales and revenue thereby reducing farmers’ administrative burden. Moreover, the resultant taxable income can be lower and therefore this method can be more favourable for farmers than using the actual income method. Alternatively, it could be argued that the calculated net yield indices do not adjust to the average of the farms when there are climatic adversities and so adjustments often have to be made to reduce the net yields calculated a priori.
Income from agricultural or forestry activities are subject to a special withholding tax rate of 1% for fattening pig and poultry and 2% for all other activities. Additionally, farmers must pay a 2% tax on their volume of sales obtained in each quarter.
34.3. Property taxes
An annual real estate tax is levied by the municipalities on immovable property. The taxable base is the cadastral value as determined by the General Directorate of the Cadastre. The tax rate for urban real estate is between 0.4% and 1.1% while for rural real estate tax rates range from between 0.3% and 0.9%.
Wealth tax is calculated on the basis of the net value of the assets and rights owned by natural persons. For real estate the tax base is the greater value of the following three: the cadastral value; the value verified by the government for the purposes of other taxes; or the sales price. A minimum exemption of EUR 700 000 is applicable to all net assets. The wealth tax rates are progressive and range from 0.2% to 2.5% and the autonomous regions are responsible for setting the wealth tax in their territory. There are no concessions for agriculture.
Inheritance and gift taxes are levied on property passed to individuals by way of gift or on death. Inheritance tax is payable on transfers of property and is based on the net value of the estate reduced by deductible charges, debts and expenses. The law allows a reduction in the taxable base depending on the heir’s relationship to the deceased. Transferred assets are valued at their fair market value. As the autonomous regions are responsible for setting the tax rates and rules, these may vary from region to region. Where the recipient is the spouse or child of the deceased an additional deduction applies in the case of a family business or the permanent residence of the deceased. This deduction is 95% of the value of such property limited to EUR 123 000. There are no concessions for the agricultural sector.
The transfer tax applies to the transmissions of all kinds of assets, leases, sharecropping and sublease. Set by the autonomous regions, the tax rates charged on the purchase prices range between 6% and 8% for real estate and 4% for movable or semi-personal property. In the case of leases, rates range from 0.3% to 0.8% of the taxable base. There are no explicit concessions to taxes on the transfer of agricultural assets.
To enable the continuity of agricultural businesses in some instances where farms qualifying as ‘priority holdings’ are transferred between family members, the transfer is excluded or partial exempt from taxes.
34.4. Tax on goods and services
Value add tax is levied on most business and professional transactions carried out within Spain and on all goods imported into Spain. The standard VAT rate is 21%. A reduced rate of 10% applies to food, animals, some goods used in agricultural activities, water, most ornamental plants, medicines, first transfer of houses and many transport services. A super-reduced rate of 4% applies to various basic necessities i.e. bread, flour, milk, cheese, eggs, fruit and vegetables and cereals.
Approximately 90% of small-scale farmers in Spain are not VAT registered and operate under a Special Regime for Agriculture, Livestock and Fisheries (REAGP). REAGP is open to farmers with incomes from agricultural activities below EUR 250 000 (and total purchases of less than EUR 150 000). Under the REAGP producers can charge a flat rate of 12% on agricultural and forestry products and 10.5% on livestock and fishery products sold to VAT registered customers. These flat rate amounts allow farmers to be compensated for the VAT tax paid on inputs they have purchased for the running of their farming business.
Farmers can also choose to use the general VAT system.
An electricity tax applies to both agricultural and non-agricultural activities. Electricity used for agricultural irrigation receives an 85% reduction of the taxable base. This is to offset electricity price increases that have occurred in Spain since 2008.
The tax on hydrocarbons applies to both agricultural and non-agricultural activities. Fuel used in tractors and agricultural machinery is charged a reduced tax. The state charge for agricultural diesel is EUR 96.71 per 1 000 litres (2019) compared with the usual rate for diesel for general use of EUR 331 per 1 000 litres (2019). In addition, farmers using agricultural diesel are entitled to a tax refund of EUR 63.71 per 1 000 litres (2019). To receive the partial reimbursement of the tax farmers must be registered in the official business register.
34.5. Environmental taxes
Environmental taxes are imposed by the regions. For instance in the Extremadura and Asturias regions underutilised agricultural land is taxed. All of the autonomous regions have implemented charges for the use of water and wastewater discharges. In all regions, apart from Murcia, water for agricultural uses is exempt from charges. In Murcia livestock production must pay water use fees. Where water is contamination with fertilisers, pesticides and other organic matter from agricultural, forestry and livestock activities, most regions charge a fee. The fee is determined by different coefficients depending on the pollutant discharged.
A tax has been implemented on fluorinated greenhouse gases which have a global warming potential higher than CO2. While agriculture is not directly effected by this tax, it does impact the food storage and distribution chain, since these gases are used in the operation of refrigeration systems.
34.6. Tax incentives for R&D and innovation
Tax deductions to the corporate tax exist for the for the realisation of R&D projects and/or technological innovation. The tax incentives are available for all companies, whatever their activity or size, undertaking R&D in all kinds of areas of knowledge and there are no limits on their R&D expenditure. Companies also receive reductions on the social security contributions they pay for research staff.
34.7. Other taxes
Employees in the agricultural sector are obliged to contribute to the social security system but they pay reduced contribution rates.
Self-employed agricultural workers benefit from a reduced rate of social security contribution only up to a certain limit of the contribution base. After that limit they are required to pay the same rate as other workers.