Written by 6:39 pm EU Investment

Madrid region steps up Spanish tax war with new investor incentives

Spain’s domestic tax war intensified on Thursday when the Madrid regional administration unveiled incentives for individual investors aimed at undercutting the national government’s fiscal policies.

At the start of an election year where the economy is in the spotlight, the move opened a new front in a fierce battle between rightwing and leftwing leaders across Spain over fiscal prudence and personal finances.

Madrid’s plans were announced by Isabel Díaz Ayuso, the firebrand head of the conservative regional government, who reinforced her national profile by marrying them with an attack on Pedro Sánchez, Spain’s Socialist prime minister.

Describing her move as a “counterweight” to taxes introduced by the prime minister, whom she has accused of running a totalitarian regime, Díaz Ayuso said: “If Sánchez’s government does not leave this year, investment in Spain will plummet.”

That idea is dismissed as nonsense by officials in the central government, who note that Spain continues to attract flagship foreign investments.

Under Díaz Ayuso’s plan, individuals from outside Spain, including Spanish nationals returning from abroad, would be able to deduct 20 per cent of the value of new investments from their tax bills over a period of six years.

She said it meant that a wealthy Latin American buying a €1mn stake in a Spanish company would be able to reduce their taxes by €200,000 over the period, or that a Spanish expat coming home to buy a €300,000 apartment would cut their taxes by €60,000.

The goal was to “send a clear message to the international investment community that in Spain there are institutional counterweights and an alternative to this [central] government”, she said.

A Spanish finance ministry official said: “The government of the Community of Madrid is seeking to divert attention from reality. While the government of Spain demands more from those who have the most and takes measures to help the majority, the Ayuso government wants the burden of the crisis to fall on the middle class, workers and the most vulnerable.”

In a general election due in December, Díaz Ayuso’s conservative People’s party (PP), led nationally by the low-key Alberto Núñez Feijóo, will seek to eject Sanchez after more than five years in power. The latest polls show that the PP is ahead of Sánchez’s Socialists but would struggle to secure an absolute majority in parliament. The two parties will also compete in regional elections in May.

Máriam Martínez-Bascuñán, a political scientist at the Autonomous University of Madrid, said Díaz Ayuso’s move was consistent with her broader strategy.

“She is engaged in national politics all the time and the core of that is opposing the Sánchez model,” she said. “If there is someone in the PP who follows the populist manual it’s her. It’s ‘us against them, we are the victims of the central government’.”

The Madrid region, home to nearly 7mn people who traditionally elect PP leaders, has long been seen as a fiscal haven because it has the lowest tax rates of Spain’s 17 administrative areas.

Although Spain is one of the few EU countries that levies a national wealth tax on individual assets, Madrid residents do not pay it because the regional government has provided a 100 per cent discount since 2008.

Last year, as the Sánchez government sought to raise funds to tackle the cost of living crisis, it introduced a new tax on “large fortunes”, a levy of at least 1.7 per cent on assets of more than €3mn.

Earlier this week Díaz Ayuso said that Madrid would this month file a legal challenge against the levy at Spain’s constitutional court. The finance ministry said the tax would affect only 0.1 per cent of taxpayers.

Rodrigo Ogea, co-managing partner of law firm Baker McKenzie in Spain, said Díaz Ayuso was fighting an attempt by Sánchez to rob regional administrations of their fiscal independence. “The central government thinks that the autonomous communities, especially Madrid and Andalucía, are engaged in fiscal dumping, that their tax policies are resulting in unfair competition.”

Officials in the Sánchez government say an inflow of big investments shows that it has made Spain an attractive destination. Aided by tens of billions of euros of post-pandemic EU recovery funds, they point to Volkswagen-owned Seat’s commitment to build a battery plant for electric vehicles and to Cisco’s plans to open a semiconductor design centre.

Spain is hungry for investment in part because of its high unemployment rate and its large public debt load, which is equal to 116 per cent of gross domestic product.

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