Spain’s central government could learn some valuable lessons about sound tax policy from its regional administrations and neighboring European countries. According to the 2026 International Tax Competitiveness Index (ITCI), Spain has dropped significantly from 27th to 35th place out of 38 Organisation for Economic Co-operation and Development (OECD) countries. This downward spiral reflects a series of tax increases, the introduction of novel levies, and weaker overall performance across every major tax category under Prime Minister Pedro Sánchez’s administration. While the central government serves as the primary driver behind this decline, regional policies also play a complex role in shaping Spain’s overall economic competitiveness.
Spain’s contemporary tax landscape is defined by competing regional and central philosophies. While several regional governments have worked diligently to offset distortive central taxes—particularly those targeting personal income, wealth, and inheritance—the country’s overarching tax competitiveness has deteriorated markedly over the past eight years. Strengthening this competitiveness at both the regional and national levels should be an urgent policy priority for lawmakers in Madrid.
To capture these internal divisions and policy divergences, the Spanish Regional Tax Competitiveness Index (RTCI) compares the country’s 19 regions across more than 60 individual variables. These metrics cover individual income taxes, wealth taxes, inheritance taxes, transfer taxes, stamp duties, and a variety of other regional levies. The stark contrast between central uniformity and regional innovation offers critical lessons for future fiscal reform. Economists note that by simply repealing the various taxes and rate hikes introduced during Pedro Sánchez’s tenure, Spain could dramatically improve its position on the international stage, vaulting from 35th back up to 22nd place in the ITCI rankings.
Corporate Income Tax
Spain currently ranks 33rd globally when it comes to corporate tax competitiveness. Several distinct policy choices explain this lagging performance. First, the country maintains both a patent box regime and a research and development (R&D) tax credit. While these provisions are ostensibly intended to encourage domestic innovation, they favor specific targeted activities rather than treating overall business investment neutrally. This non-neutrality increases compliance complexity and distorts natural business decisions.
Second, Spain’s corporate tax apparatus has grown increasingly complex following the establishment of a national minimum tax in 2021. This measure severely limits the practical utility of deductions, credits, and investment incentives that would otherwise be available to larger enterprises. Third, Spain stands out as one of just 10 OECD countries that levy a digital services tax (DST). Because digital services taxes target gross revenues rather than net income, they place a disproportionately heavy burden on low-margin firms trying to scale in a competitive digital economy. Finally, Spain’s statutory corporate income tax rate of 25 percent—and 28 percent in the region of Navarra—remains stubbornly above the OECD average of 24.2 percent.
Individual Taxes
The individual tax component of Spain’s index score has also worsened, slipping from 15th place in 2017 down to 20th. This decline is largely driven by repeated, aggressive increases in taxes levied on capital income. Since 2019, the top tax rate applied to capital gains and dividends has climbed by a cumulative seven percentage points. Furthermore, Spain maintains some of the highest top income tax rates in all of Europe.
When the central government pushed the national top marginal income tax rate from 45 percent to 49 percent, several regional governments responded by moving in the opposite direction to attract talent and capital. The regional government of Madrid reduced its combined central and regional top rate to 45 percent, while Andalusia, Castilla-La Mancha, Galicia, and Murcia lowered their top rates to 47 percent. Meanwhile, Castile and León trimmed its rate down to 46 percent.
However, headline tax rates tell only part of the story. An equally pressing structural issue is bracket creep, a phenomenon where inflation or real income growth pushes taxpayers into progressively higher tax brackets even when their real, purchasing-power-adjusted income has not actually increased. While the vast majority of European nations automatically index their income tax systems to inflation, Spain’s central government has consistently refused to do so.
Regional governments, by contrast, have proven far more proactive. In 2026, the Canary Islands and the Basque provinces moved to index their tax brackets to inflation. The Valencian Community and Extremadura lowered their personal income tax rates outright, while La Rioja made history by becoming the first Spanish region to enshrine automatic inflation adjustments for tax brackets and personal deductions directly into law.
Consumption Taxes
Spain ranks 18th internationally on consumption taxes. However, a closer look reveals structural inefficiencies: only about 45 percent of total consumption is actually covered by the standard value-added tax (VAT). This narrow coverage is the result of numerous exemptions and reduced rates that complicate the administration of the tax system and distort consumer choices.
When a government exempts certain goods and services from VAT or taxes them at preferential, reduced rates, it must maintain a higher standard rate to raise sufficient public revenue. Economic analysts argue that broadening the VAT base by eliminating these carve-outs could create valuable fiscal space, potentially allowing the government to lower the overall standard VAT rate from its current 21 percent down to 12 percent.
Property Taxes
Spain performs worst in the property tax category, languishing at 35th place internationally. The nation levies a dense web of overlapping taxes on assets and transactions, including traditional real property taxes, property transfer taxes, capital duties, financial transactions, net wealth taxes, inheritances, and gifts. Combined, these levies form a massive administrative burden that significantly undermines Spain’s overall economic competitiveness.
Spain remains one of the very few OECD countries that continues to impose a recurring net wealth tax. Although the country initially abolished the levy in 2008, it was subsequently reinstated, prompting several regional governments to adopt substantial relief measures to protect their local economies. Madrid maintained a 100 percent exemption, a policy later mirrored by Andalusia and Extremadura, while Galicia introduced a 50 percent reduction.
The central government moved aggressively in the opposite direction in 2022 by instituting a temporary solidarity tax on high-net-worth individuals. Designed to act as a federal top-up in regions that offered substantial wealth tax rebates, the measure was eventually made permanent. In response, several regions engineered clever offsetting mechanisms. Andalusia, Cantabria, La Rioja, Madrid, and Murcia designed regional rebates that effectively redirected revenue collections from the central government back into regional budgets without increasing the actual tax liabilities of their residents.
Extremadura took a different path, maintaining 100 percent relief without introducing an offsetting mechanism, thereby allowing the central government to collect the solidarity tax directly from residents possessing net wealth exceeding three million euros. Other regions eased wealth tax pressures through alternative reforms, such as the Balearic Islands raising their exemption threshold to three million euros and the Valencian Community raising its threshold to two million euros.
Inheritance and gift taxation is similarly administered at the regional level. Following recommendations from the RTCI, numerous regions have introduced a 99 percent tax relief for close heirs, bringing the total number of regions offering substantial relief to 11. Several of these administrations have also expanded similar relief measures to more distant relatives.
Even with these regional adjustments, Spain continues to enforce some of the highest inheritance tax rates in Europe. For distant relatives or unrelated beneficiaries, top marginal rates can reach a staggering 87.6 percent in Asturias and Murcia. Although inheritance and gift taxes generate relatively little public revenue, they interact heavily with wealth inequality because inheritances represent a massive share of household assets for lower-wealth families. This dynamic is especially pronounced in Spain, where inherited wealth accounts for 95.6 percent of total net wealth. Given their limited revenue-raising capacity and their proven dampening effect on savings, entrepreneurship, and work incentives, fiscal experts suggest policymakers should seriously consider repealing inheritance and gift taxes altogether.
What’s Next?
To restore its economic standing, Spain should implement principled tax reforms aimed at bolstering growth by making the tax code simpler, broader, and more neutral. Instead, over the past decade, Pedro Sánchez’s government has pursued policies that institutionalize complexity and erode competitiveness.
A prominent recent example is the extension of the bank windfall tax. Originally introduced as a temporary measure for 2023 and 2024, the tax was extended through 2026. Although it is scheduled to expire and unlikely to be renewed, economists argue it should never have been implemented in the first place. Because the levy is based on banks’ net interest income and net fees rather than true economic profits, it fails to target actual windfall gains. The progressive tax ranges from 1 to 6 percent and is partially deductible from the corporate income tax base.
The European Central Bank has repeatedly warned that sector-specific levies of this nature can restrict credit availability, weaken financial institutions during economic downturns, drive up interest rates, distort market competition, and trigger protracted legal battles. Because it targets only a single industry, the tax directly violates the core principle of tax neutrality.
At the same time, Spain has continued ratcheting up capital income taxes, pushing the rate on capital gains exceeding 300,000 euros up by another two percentage points to 30 percent. Though projected to yield negligible revenue, this move continues an upward trajectory that has seen capital taxes climb by seven percentage points since 2019. Higher levies on capital income do little to fill state coffers while actively discouraging domestic investment and making Spain far less attractive compared to rival jurisdictions.
Policymakers should also reevaluate the domestic minimum tax regime established in 2021, as it undercuts the practical value of standard deductions, tax credits, and capital investment incentives for large enterprises—particularly those already complying with Pillar Two’s global minimum tax standards.
Rather than pursuing continuous tax hikes, the central government should look to the successful reform models pioneered by its own regional administrations and overseas competitors. By rolling out nationwide inflation indexing to eliminate bracket creep and following the lead of countries like Portugal in returning past fiscal windfalls through targeted tax cuts, Spain could revitalize its economy and reclaim its competitive edge on the global stage.
