
On 14 November, the Madrid Assembly passed Law 4/2004, which establishes a deduction in Personal Income Tax (PIT) for investments made by new taxpayers from abroad.
This new tax incentive, commonly known as the Mbappé Law, has the following features:
1. Deduction in Personal Income Tax (PIT)
A new tax incentive is created in the form of a deduction from the gross PIT payable for certain investments.
2. Eligible persons
Taxpayers who have not been resident in Spain for tax purposes during the previous five years (whether or not they are from the EU) and who transfer their residence to the territory of the Community of Madrid may benefit from the deduction.
Specifically, the deduction may be applied by those individuals who become tax residents of the Community of Madrid as of 1 January 2024.
3. Investments eligible for the deduction
The deduction is granted for investments in:
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- Securities representing the transfer of own capital to third parties, whether or not traded on organised markets (public or private debt).
- Securities representing a participation in the equity of any type of entity, whether or not traded on organised markets.
The investment may therefore consist of, among other things, listed shares or investment funds.
If the investment is made in unlisted shares, additional conditions are imposed: (i) the entity must not be domiciled or incorporated in a tax haven, (ii) the joint shareholding of the taxpayer and persons related to the taxpayer (up to a certain degree) must not exceed 40%, and (iii) the taxpayer must not perform executive or managerial functions or have an employment relationship with the entity.
4. Deadline to make the investments
The investment must be made in the year in which the tax residence in the Community of Madrid is acquired or in the following year.
In the event that the investment is made in Spanish entities, it can also be made in the year preceding the year in which the tax residence in the Community of Madrid is acquired.
5. Amount of the deduction and deadline for its application
The deduction is 20% of the value of the investments made, with no quantitative limit.
In general, the deduction can be applied in the year in which the investment is made and in the following 5 years (in case of insufficient PIT liability).
6. Conditions to maintain the deduction
In order to maintain the right to apply the deduction, the following conditions must be met:
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- Investments must be maintained over a period of 6 years (transfer of securities with reinvestment is permitted in certain cases).
- The tax residence in the Community of Madrid must be maintained for the same period.
As evidenced, the tax savings that can be obtained by adhering to the Mbappé Law in terms of PIT are very significant.
However, we recommend a case-by-case study to assess the appropriateness of applying this regime. In this respect, we consider the following aspects to be key:
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- Although the deduction does not have a maximum amount (it is 20% of the investments made), it is important to note that it is a deduction from the PIT payable.
It is therefore an interesting incentive, as long as it is expected to generate income that can absorb the deduction generated.
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- The Mbappé Law is incompatible with the Beckham Law, which may also apply to taxpayers who transfer their residence to Spain.
In the event that the taxpayer qualifies for both the Mbappé Law and the Beckham Law, a comparative analysis of the two regimes applied to the specific case is necessary.
It is important to note, in this regard, that the Mbappé Law may be applicable to certain types of taxpayers (HNWI, entrepreneurs, sportsmen, artists, pensioners, etc.) who do not have access to the Beckham regime.
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- In addition to Personal Income Tax, the taxpayer’s taxation under Wealth/Large Fortunes Tax and/or Inheritance and Gift Tax should be considered.
In particular, if the taxpayer has investments in companies, it should be assessed whether these qualify as family businesses in Spain.