Wealth Tax in Madrid: zero regional levy, but the Solidarity Tax kicks in above €3M

Wealth Tax in Madrid: the 100% rebate that does not eliminate all liability

The Community of Madrid has maintained a 100% rebate on the regional Wealth Tax (Impuesto sobre el Patrimonio, IP) since 2008. This single measure made Madrid the most attractive region in mainland Spain for high-net-worth individuals from a wealth taxation standpoint. Residents of Madrid owe no regional IP regardless of the size of their estate — a stark contrast to Catalonia (rates up to 2.75%), the Balearic Islands (rates up to 3.45% — the highest in Spain), or the Canary Islands (rates up to 2.50%).

However, the landscape changed substantially in 2023. The Solidarity Tax on Large Fortunes (Impuesto de Solidaridad de las Grandes Fortunas, ISGF), introduced by Law 38/2022, was explicitly designed to neutralise the Madrid and Andalusia IP rebates and ensure a minimum effective taxation on net assets above €3 million. Spain’s Constitutional Court upheld the ISGF in 2024, settling any legal doubts about its validity.

The result for Madrid residents with large estates is a two-tier system: zero regional IP (thanks to the 100% rebate) plus a national solidarity levy at 1.7%–3.5% on net assets above €3M (because the regional IP paid — zero — cannot be offset against the ISGF). Understanding this structure and planning around it requires precise knowledge of both tributes, the available exemptions, and the interaction between regional and national rules.

The Solidarity Tax on Large Fortunes: how it works in Madrid

The ISGF uses the same taxable base as the IP — net assets at 31 December of each year, valued under the IP Law rules, minus the €700,000 personal allowance (plus €300,000 for the primary residence). The ISGF scale has three brackets:

From the ISGF liability, any IP actually paid at the regional level is deducted. For Madrid residents whose regional IP is zero (100% rebated), this deduction is nil — the ISGF is paid in full.

A net estate of €5M (after deducting the €700K allowance, taxable base = €4.3M):

• First tranche (€3M–€5M): 1.7% × €2M = €34,000
• Second tranche (€4.3M–€5M): 2.1% × €1.3M = €27,300
• Total ISGF = approximately €61,300 annually.

A net estate of €10M (taxable base ≈ €9.3M):

• Total ISGF approximately €145,000 annually.

These figures underscore why ISGF planning is essential for large asset holders in Madrid: annual six-figure tax bills require structured, proactive management.

The family business exemption: the primary planning tool

The most powerful instrument for reducing the IP and ISGF taxable base in Madrid is the family business exemption under Article 4 of the IP Law (Ley 19/1991). When shares in an operating company qualify, their entire value is excluded from the taxable base of both the IP and the ISGF.

Qualifying conditions (must all be met simultaneously):

1. Economic activity test: the entity’s principal activity must not be the management of a securities portfolio or real property portfolio. If more than 50% of the entity’s assets are unproductive (held-for-investment) rather than deployed in an active business, the exemption is lost.

2. Minimum shareholding: the taxpayer must hold at least 5% of the entity’s capital individually, or at least 20% together with their spouse, ascendants, descendants, and collateral relatives to the second degree.

3. Remunerated management function: the taxpayer (or a qualifying family member) must perform effective management functions in the entity for which they receive remuneration that exceeds 50% of their total earned income from employment and business activities.

When all three conditions are met, 100% of the qualifying shares’ value is excluded from the IP and ISGF bases. For a family business valued at €12M in Madrid, meeting the Art. 4 conditions can eliminate an ISGF charge of approximately €350,000 per year.

BMC conducts an annual review of our clients’ family business structures to confirm that the Art. 4 conditions are met and to identify risks — particularly the economic activity test and the remuneration threshold — before the 31 December assessment date.

Non-resident investors with Madrid assets

Since the 2021 reform of the IP Law, non-residents with assets in Spain apply the regional rules of the community where the majority of their Spanish assets are located, rather than the national rules. A non-resident whose Spanish assets are primarily in Madrid (for example, a luxury property in the Salamanca neighbourhood or a shareholding in a Madrid-based company) applies the Madrid rules, including the 100% IP rebate.

This represents a significant improvement over the pre-2021 position, when non-residents applied the national IP schedule regardless of where their assets were located — and therefore did not benefit from Madrid’s 100% rebate.

For non-residents whose net Spanish assets exceed €3M, the ISGF applies on the same basis as for residents. The national solidarity levy does not discriminate between residents and non-residents.

BMC handles the IP and ISGF filings for non-resident clients with assets in Madrid, including the NIF/NIE registration, model 714 (IP, with zero liability but mandatory above €2M base), model 718 (ISGF where applicable), and coordination with the client’s home-country advisers on the interaction with any equivalent wealth levy in their country of residence.

Relocating to Madrid: what it takes and what it achieves

Madrid attracts a steady flow of high-net-worth individuals from other Spanish regions — particularly from Catalonia and the Balearic Islands — and from abroad, motivated in part by the favourable Wealth Tax position. For the relocation to be effective from a tax standpoint, it must be genuine:

Physical presence: more than 183 days per year in Madrid. The Tax Agency cross-references mobile phone records, toll payments, utility consumption, and other data.

Genuine primary residence: the Madrid address must be the actual home, not merely a registered address. Owning a property in Madrid is necessary but not sufficient — the property must be genuinely used as the main home.

IRPF five-year lock-in: under Art. 72.3 of the Personal Income Tax Law, changes of tax residence to lower-tax regions have no effect on the IRPF if the taxpayer returns to the origin region within five years. This rule targets sham relocations and means that even if the IP benefit is available from year one of genuine residence, the IRPF benefit from lower rates requires a five-year commitment.

Documentation: it is advisable to document residence thoroughly — notarised declaration of habitual residence, utility contracts, bank statements showing local spending, professional activities in Madrid. If the Tax Agency initiates a residence audit, thorough documentation is the key defence.

For clients who are considering a genuine relocation to Madrid, BMC provides a comprehensive pre-move analysis covering all tax implications: IP, ISGF, IRPF, Inheritance Tax (virtually eliminated in Madrid with the 99% rebate), and the impact on the family business structure.

Madrid Wealth Tax in context: a comparative view

To place Madrid’s Wealth Tax position in context, the following table illustrates the effective annual cost of the IP and ISGF combined for different net estate levels, by region:

The table shows that the ISGF equalises the total wealth tax burden across regions for large estates above €3M–€5M. The material Madrid advantage exists primarily for estates between €700,000 and €3M: in this range, residents in Madrid pay nothing, while residents in Catalonia or the Balearics pay several thousand to tens of thousands of euros annually.

For the Canary Islands, the IP rates are moderate but the Inheritance and Gift Tax (ISD) is even better than Madrid — 99.9% rebate for direct-line heirs versus Madrid’s 99%. For families prioritising intergenerational wealth transfer over annual wealth holding, a careful comparison of all relevant tributes is needed before choosing a region of residence.

Official guidance on IP and ISGF filings is available from the Spanish Tax Agency (AEAT) and the Madrid Tax Office (ATM).