Spain’s Tax Competitiveness Has Declined Since 2018

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. According to the 2026 International Tax Competitiveness Index (ITCI), Spain has dropped from 27^th to 35^th (out of 38 Organisation for Economic Co-operation and Development [OECD] countries), reflecting multiple tax increases, new taxes, and weaker performance across all major tax categories under Pedro Sánchez’s government. While the central government is the main driver behind this drop, regional policies also affect Spain’s overall competitiveness.

Spain’s tax system reflects competing regional and central policies. While some regions have offset distortive central taxes, particularly on wealth, inheritance, and personal income, overall tax competitiveness has declined markedly over the past eight years. Strengthening competitiveness at both levels of government should therefore be a policy priority.

To capture these differences, the Spanish Regional Tax Competitiveness Index (RTCI) compares the country’s 19 regions across more than 60 variables covering individual income taxes, wealth taxes, inheritance taxes, transfer taxes and stamp duties, and other regional taxes. The contrast between central and regional approaches offers important lessons for future reform.

By repealing the taxes and tax increases introduced during Pedro Sánchez’s administration, Spain could improve its position in the ITCI, moving from 35^th to 22^nd place.

Spain’s 2026 International Tax Competitiveness Index Score and Ranking by Category

Source: Tax Foundation, 2026 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 ranks 33^rd on corporate tax competitiveness. Several policy choices explain this poor result. 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. regime and a research and development (R&D) tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer’s tax bill directly.. While intended to encourage innovation, these incentives favor specific activities rather than treating investment neutrally, increasing complexity and distorting business decisions. Second, Spain’s corporate tax system has become increasingly complex following the introduction of the national minimum tax in 2021, which limits the practical value of deductions, credits, and investment incentives available to large businesses. Third, Spain is one of the10 OECD countries that levy a digital service tax (DST). Since DSTs tax gross revenues rather than net income, they can disproportionately burden low-margin firms. Finally, Spain’s 25 percent corporate income tax (28 percent in Navarra) remains slightly above the OECD average of 24.2 percent.

Individual Taxes

Spain’s individual tax component also declined from 15^th in 2017 to 20^th, largely due to repeated increases in taxes on capital income. Since 2019, the top tax rate on capital gains and dividends has increased by seven percentage points. Spain also has one of Europe’s highest top income tax rates. When the central government increased the national top marginal income tax rate from 45 percent to 49 percent, several regions moved in the opposite direction. Madrid reduced its overall (central and regional) top rate to 45 percent, while Andalusia, Castilla-La Mancha, Galicia, and Murcia lowered theirs to 47 percent, and Castile and León cut it to 46 percent.

However, tax rates are only part of the picture. An equally important issue is bracket creepBracket creep occurs when inflation, or real income growth, pushes taxpayers into higher income tax brackets. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state levels—are adjusted for inflation. Over time, bracket creep can increase how much income tax people owe as their income grows, either due to inflat, which occurs when 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 pushes taxpayers into higher 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. even if their real income has not increased. While most European countries index their income tax to inflation, Spain’s central government refused to do so. Regional governments have been more proactive. In 2026, the Canary Islands and the Basque provinces indexed tax brackets to inflation. The Valencian Community and Extremadura reduced their personal income tax rates, while La Rioja became the first Spanish region to adopt automatic inflation adjustment for tax brackets and personal deductions.

Consumption Taxes

Spain ranks 18^th on consumption taxes. However, only 45 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 from 21 percent down to 12 percent.

Property Taxes

Spain performs worst in the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. category, ranking 35^th internationally. The country levies a variety of taxes on assets and transactions, including taxes on real property, property transfers, capital duties, financial transactions, net wealth, inheritances, and gifts. Together, these taxes contribute significantly to Spain’s weak competitiveness.

Wealth Taxes

Spain remains one of the few OECD countries that still impose a net 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.. While the country abolished the tax in 2008 and later reinstated it, some regions adopted substantial relief measures. Madrid maintained a 100 percent exemption, later followed by Andalusia and Extremadura. Galicia introduced a 50 percent reduction.

The central government moved in the opposite direction in 2022 by creating a temporary solidarity tax on high-net-worth individuals, which complements the regional wealth tax and acts as a top-up in regions that provide substantial rebates. Initially introduced for 2022 and 2023, the measure was later made permanent.

Several regions responded by creating offsetting mechanisms. Andalusia, Cantabria, La Rioja, Madrid, and Murcia designed regional rebates that effectively redirected revenue from the central government to regional budgets without materially changing taxpayers’ liabilities.

Unlike other regions, Extremadura kept the 100 percent relief and did not introduce an offsetting mechanism, enabling the central government to collect solidarity tax from residents with net wealth exceeding €3 million.

Other regions reduced wealth tax burdens through different reforms. The Balearic Islands increased the exemption threshold to €3 million, while the Valencia Community increased it to €2 million.

Inheritance and Gift Taxes

Inheritance and gift taxation is also administered by regional governments. Following RTCI recommendations, many regions have introduced 99 percent relief for close heirs, bringing the total number offering significant relief to 11. Several regions have also expanded relief to more distant relatives.

Even so, Spain still imposes some of the highest 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. rates in Europe. For distant or unrelated heirs, top rates can reach 87.6 percent in Asturias and Murcia.

Although inheritance and gift taxes raise little revenue, they can reduce wealth inequality because inheritances are relatively larger for lower-wealth households. This effect is particularly relevant in Spain, where inherited wealth accounts for 95.6 percent of net wealth.

While inheritance and gift taxes collect little revenue, a recent study reveals that inheritances can reduce wealth inequality as inheritances are proportionately larger for lower-wealth households. This effect is particularly relevant in Spain, where inherited wealth accounts for 95.6 percent of net wealth. 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.

What’s Next?

Spain should implement principled tax reforms that support economic growth by making the tax code more neutral and competitive. Instead, over the past decade, Pedro Sánchez’s government has adopted a number of tax policies that have increased complexity and weakened the country’s tax competitiveness.

One recent example is the extension of the bank windfall tax, originally introduced as a temporary measure for 2023 and 2024, through 2026. Although the tax is set to expire in 2026 and is unlikely to be renewed, it arguably should never have been introduced. It does not target profitability (windfall or not) as it is based on banks’ net interest income and net fees. The new tax is progressive, ranging from 1 to 6 percent, and is partly deductible from the corporate income 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..

The European Central Bank has warned that such taxes could reduce credit availability, weaken banks during economic downturns, raise interest rates, distort competition, and increase litigation. Because the tax applies only to a specific sector, it also departs from the principle of tax neutrality.  

Spain has likewise continued raising capital income taxes, increasing the rate on capital gains above €300,000 by 2 percentage points to 30 percent. Although expected to generate little revenue, the increase continues a trend begun in 2019, marking a seven-percentage-point increase since then. Higher taxes on capital income are unlikely to generate substantial additional revenue but can discourage investment and weaken Spain’s attractiveness relative to competing jurisdictions.

Policymakers should also reconsider its domestic minimum tax regime, introduced in 2021, as it limits the practical value of deductions, tax credits, and investment incentives for large businesses, especially those already covered by Pillar Two’s qualified domestic minimum top-up tax (QDMTT).

 

Policymakers should refrain from raising taxes and consider repealing the taxes introduced during Pedro Sánchez’s administration, including the windfall profits, digital services, financial transactions, national minimum, solidarity, and wealth taxes. Together with a reduction in the top tax rate on capital gains and dividends from 30 percent to 23 percent, these reforms would move Spain from 35^th to 22^nd place in the ITCI. Spain could also follow Portugal’s lead and use the additional revenue raised during past years to cut taxes. Finally, Spain should adopt nationwide inflation indexingInflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in nominal dollars, rather than rates, slowly lose value. similar to the model pioneered by La Rioja, preventing 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.

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