1. Introduction
On 28 November 2024, the Madrid regional Parliament enacted Law No. 4/2024, which creates a new significant tax incentive for those natural persons who relocate from outside of Spain to Madrid.
Since this tax incentive was first announced when Real Madrid Football Club hired the renowned player Kylian Mbappé, people commonly refer to this law and tax incentive as the “Mbappé Law”.
In this article we discuss the key aspects of the Mbappé Law and how you may benefit from it.
2. What is the tax incentive?
The Mbappé Law creates a tax deduction from personal income tax (“PIT”).
In particular, persons who meet the requirements of the Mbappé Law, relocate to Madrid and invest in qualifying investments generate a tax credit equal to 20% of the amount invested. This tax credit can be offset against the PIT liability in the same year of the investment or the following five years.
In practical terms, the Mbappé Law creates an immediate, after-tax 20% return on an investment, with relatively few requirements. The difference is that instead of the return consisting in actual money flowing in, the return is by way of less taxes payable. If you add the positive, actual return that the investment may yield, and the fact that the person is not obliged to sell the asset and trigger a capital gain at any point, the tax incentive is highly attractive.
This tax deduction operates at the level of the tax quota which is attributable to the Madrid region only. In most part of Spain, including in Madrid, half of the PIT liability is attributed to the Central State and half to the regions, also known as Comunidades Autónomas.
A numerical example may help: a qualifying investment of EUR 100 would give rise to a EUR 20 tax credit, but such EUR 20 could only be offset against the EUR 20 tax quota which is attributable to Madrid. In most cases, a Madrid tax quota of EUR 20 would mean that the starting total tax quota of a person – combining the Central State and the Madrid region’s tax quota – is twice as much, EUR 40.
The tax credit can only be offset in the year of the investment and the subsequent five years.
3. What are the requirements?
The tax incentive applies if the person meets all the following requirements:
- The person has not been tax resident in Spain during the last five years.
- The person relocates his or her tax residence to the Madrid region.
- The person invests in equity or debt securities in any entity. Such securities can be located anywhere in the world, they do not need to be located in Spain or consist of Spanish assets. They may or may not be listed in any stock market.
- In case of investments in equity securities: the person should not own, along with relatives up to the second degree (for example siblings), more than 40% of the capital or voting rights of the invested entity; the invested entity cannot be incorporated or domiciled in a tax haven; and the person cannot perform executive or management tasks in such entity, and he or she cannot be employed by such entity.
- The person must make the investment in the year when he or she becomes tax resident in Madrid or the year immediately after. In case the investment is in securities located in Spain, the investment can also be made the year before becoming tax resident in Madrid.
- The person keeps the investment during six years. It is possible to sell the investment and reinvest the proceeds in other qualifying assets, but the reinvestment must be made within one month from the date of sale. Needless to say, the person may keep the investment and move out of Spain after six years.
- The person stays as tax resident in Madrid during six years.
It is not necessary to be a Spanish or European Union national to benefit from the Mbappé Law – nationals of any country may benefit. However, regarding non-EU nationals, since the first condition is to become tax resident in Madrid, it follows that as a pre-condition they would require a visa/residence permit to stay and reside there lawfully. This is an immigration law aspect that persons wishing to relocate to Spain should also check.
If the person ceases to meet the requirements – for instance moves out of Spain in the third year -, he or she would be required to pay back the tax credit used.
4. Is it compatible with being an impatriate under the Beckam Law?
No, they are not compatible.
5. Is it better to benefit from the Mbappé Law or being an impatriate under the Beckham Law?
It depends.
The impatriate regime under the Beckham Law provides great tax advantages with the right tax planning, both from a PIT and wealth tax perspective. As explained in our previous post, the tax benefits of the Beckham Law also extend to the tax on large fortunes, as confirmed by the General Directorate of Taxation in its tax ruling V0420-23 submitted by us and issued to one of our clients.
Generally speaking, our view is that the Beckham Law should deliver better outcomes in most cases. However, the Beckham Law requires more stringent requirements, which for some people may be difficult to meet.
Our view is that anyone wishing to relocate to Spain should analyse and compare, through a detailed a tax simulation, the pros and cons of both tax regimes. A good exercise by a professional tax advisor should take into account personal income tax, wealth tax, the tax on large fortunes and, if the person earns income from abroad, international aspects such as withholding tax in foreign countries and eligibility to double tax treaty relief.
6. Who is the main target of the Mbappé Law?
The main target are people who have been tax resident out of Spain at least five years and do not meet the requirements of the Beckham Law – for instance, professional sportsmen, who are explicitly excluded from the Beckham Law.
In general, beneficiaries may be people who have been tax resident out of Spain for five years; have significant cash or liquid assets that are ready to be turned into cash and be used to invest, such as equities or bonds; and who earn sufficient income annually so that the tax credit generated can be used against the part of the PIT liability attributable to Madrid.
In all cases, the person should have a clear intention to keep the investment and stay as tax resident in Madrid for six years. This would suit someone who relocates to Madrid for an extended professional or personal project. But it may not appeal to highly mobile people who may move out of Spain before the six-years mark.
7. Common pitfalls and mistakes to avoid
Natural persons wishing to benefit from the Mbappé Law should always seek professional tax advice.
From experience, common pitfalls and mistakes that may occur include the following:
- Not meeting the requirements.
- Not keeping sufficient records to prove that the person meets all the requirements.
- Not taking into account that the Mbappé Law does not affect wealth tax or the tax on large fortunes. Whilst Madrid has highly attractive incentives in this domain, these should also be analysed in every case.
- Selling the investment or leaving Madrid before six years.
7. Can you provide an example of a case where a person would benefit from the Mbappé Law?
John is a UK national who has been living in Dubai, the United Arab Emirates, for the last eight years. John is a self-employed person who provides business consulting services and makes approximately USD 150,000 net profits per year.
John has USD 500,000 saved in different stocks and ETFs within a brokerage in Ireland.
John would like to relocate to Spain. However, he does not meet the requirements of the Beckham Law because he is a self-employed person and his services do not qualify under any of the categories of the Beckham Law.
In this case, John may consider selling his USD 500,000 investments, turning them into cash and, once he relocates his tax residence to Madrid, invest such cash in qualifying shares or bonds as per the Mbappé Law. Remember that the qualifying investments do not need to be located in Spain – they can be located anywhere in the world. In fact, John may invest in securities offered by the same broker in Ireland, without going through the hassle and brokerage/bank commissions of withdrawing money. Of course, John should keep thorough records of his new investment.
If John meets the Mbappé Law’s requirements, he would generate a tax credit equal to 20% of the acquisition cost of such investments (comprising the price paid plus costs and taxes paid at the time of purchasing them). In our example, a tax credit of 20%x500,000= USD 100,000.
John should be entitled to use this tax credit against his annual PIT liability in Madrid in the following six years. If, for example, John’s annual total PIT liability was USD 50,000 per year, half of it (USD 25,000) would correspond to the Madrid region. John should be entitled to reduce the Madrid region’s part of his PIT liability by USD 25,000 for the first four years, because he would offset the USD 100,000 tax credit at a pace of USD 25,000 per year.
In summary, in this example John’s effective PIT taxation would only be 25,000/150,000= 16.67% in the first four years; and 50,000/150,000= 33% in the last two years. All of this, whilst living in one of the most vibrant and lively cities in the world.
Needless to say, the higher the amount invested the greater the tax benefit under the Mbappé Law, because there is no cap on the amount of tax credit that can be generated – the only limitation is the amount of Madrid region’s tax quota to be offset in the following five years. This stresses the need of seeking good tax advice before relocating, which allows planning in advance and ensuring that all the tax credit will be used.
After six years of living in Madrid and fulfilling the requirements of the Mbappé Law, John may decide to stay in Spain or move abroad. Although there is an exit tax in Spain, it only applies if some value thresholds are met, and only if John has been tax resident in Spain at least 10 years out of the last 15 years.
8. How we can help
Our tax team has extensive experience in private client matters. They help clients relocate countries, advise and identify investments, analyse and compare tax incentives, and hold the client’s hands in every step, so that they have peace of mind and be sure that they stay compliant.
If you would like to relocate to Madrid and enjoy its energetic and lively character, whilst benefiting from a highly attractive tax regime, do not hesitate to contact us.