Drafting error at the Spanish Treasury let wealthy taxpayers avoid 2.3 billion euros in 'solidarity tax'

A newly disclosed internal assessment found that a mechanism intended to reduce double taxation sharply curtailed the measure's revenue yield during its first year in force

Bruno Pérez

A drafting error in legislation creating Spain's temporary tax on large fortunes allowed thousands of wealthy taxpayers to avoid paying more than 2.3 ... billion euros in 2022, according to an internal report by the Ministry of Finance.

The report, prepared by the Directorate-General for Taxation and obtained by ABC, acknowledges for the first time that flaws in the law enabled wealthy residents of Madrid, Andalucía and Galicia to cut their liability under the state levy by hundreds of thousands of euros.

 In some cases, the tax burden was reduced by as much as 80 per cent compared with what the government had expected to collect.

Compensation for regional tax rebates

The Temporary Solidarity Tax on Large Fortunes was introduced by the PSOE-Unidas Podemos coalition government at the end of 2022. It was designed to increase the contribution made by individuals with declared assets exceeding three million euros and to offset regional wealth tax rebates, particularly in Madrid, which ministers argued had attracted wealthy residents seeking lower tax bills.

The government estimated that regional wealth tax rebates were costing the state around 1.5 billion euros a year and expected the new levy to recover much of that amount. However, in its first year, the tax generated only 631 million euros from more than 12,000 taxpayers.

More than three years after the tax was introduced, the Ministry of Finance has now accepted that much of the shortfall stemmed from flaws in the legislation itself.

The 166-page report concludes that the tax's "revenue-raising capacity was substantially limited" by two factors. The first was the ability to deduct wealth tax already paid, which reduced receipts by 116 million euros. The second, and far more significant factor, was the application of a combined ceiling on income tax and wealth tax liabilities, which eliminated around 75 per cent of the levy's potential yield.

According to the report, only 631 million euros of a theoretical gross liability of 2.951 billion euros was ultimately collected.

"Of the 2.951 billion euros of theoretical gross liability, only 631 million euros (21.4 per cent) materialised as tax payable, highlighting the structural limitations of the ITSGF's design in terms of revenue-raising capacity," the report states.

Preventing double taxation

The problem arose from a provision intended to prevent double taxation. The law stipulated that the combined liabilities arising from income tax, wealth tax and the solidarity tax could not exceed 60 per cent of a taxpayer's income tax base.

However, the legislation failed to specify whether the cap should be calculated using gross or net wealth tax liabilities. In regions such as Madrid, where the wealth tax was heavily rebated, taxpayers still incurred a gross wealth tax liability, even though the amount ultimately payable was substantially reduced.

The omission allowed some wealthy taxpayers to use the higher gross figure when calculating the cap, thereby reducing or eliminating their liability under the solidarity tax.

Although it was already known that the drafting error had affected revenues, the scale of its impact had not previously been disclosed.

The report states that the group of taxpayers targeted by the measure, representing around five per cent of all wealth tax filers, paid only about 21 per cent of what they would otherwise have owed.

Despite that finding, the Directorate-General for Taxation gave the measure a favourable assessment. It said the tax had proved effective in rebalancing wealth taxation between regions by bringing wealthy taxpayers in Madrid, Andalucía and other territories into the tax net, where significant wealth tax rebates were available.