The Community of Madrid has released Law 4/2024, published on November 28, 2024, in the Official Gazette of the Community of Madrid, introducing a significant tax deduction for new taxpayers arriving from abroad. This legislation, colloquially known as the “Mbappé Law,” is designed to attract both foreign capital and talent to the region by offering a tax incentive within the regional section of the Personal Income Tax (IRPF).
Below, we explain the details of this law, the requirements it imposes, and how it can benefit foreigners interested in settling in Madrid.
Key tax benefits for foreigners under Law 4/2024
1. Tax deduction for investments
Law 4/2024 allows non-residents who become taxpayers under the Personal Income Tax (IRPF) in the Community of Madrid to apply a 20% deduction on investments made in the following assets:
- Securities representing the transfer of own capital (e.g., bonds, fixed-income securities): These financial instruments reflect the allocation of funds to third parties in exchange for a return or interest, aimed at funding business or institutional activities.
- Securities representing ownership interests (e.g., shares, stakes in non-listed companies): These signify participation in the equity or capital of an entity.
Restrictions:
These investments cannot involve real estate assets or entities domiciled in tax havens. Additionally, for non-listed companies, the taxpayer and their immediate family members cannot hold more than 40% of the company’s equity.
2. Investment timing flexibility
The law allows for strategic planning of investments to optimize tax benefits and adapt to individual financial circumstances:
- The investment must be made during the fiscal year in which the taxpayer establishes tax residency in the Community of Madrid or the following year.
- Investments in securities issued by Spanish entities, whether representing the transfer of capital to third parties or ownership interests, can also be made in the year prior to establishing tax residency.
- If the initial investment is made in the year before obtaining tax residency, provided it involves Spanish entities, the investment must be retained until residency is acquired. Subsequent reinvestment is allowed under the stipulated conditions from the year of acquiring residency.
3. Compatibility with other deductions
This deduction can be applied in the fiscal year of the investment and the following five fiscal years in cases of insufficient tax liability. However, it is important to note that this benefit is not compatible with other regional deductions for the same investments.
4. Residency and exclusion requirements
To maintain eligibility for the deduction, taxpayers must comply with the following requirements:
- Continuous residency: Maintain tax residency in the Community of Madrid for at least six consecutive years.
- Investment retention: Retain the acquired assets for a minimum of six years, unless they are sold for consideration and the total proceeds are reinvested within a maximum of one month.
- Participation limit: The taxpayer’s stake in non-listed companies must not exceed 40% of the equity.
- Exclusion of executive roles: Taxpayers cannot hold executive positions or maintain an employment relationship with the company in which they invest.
Exclusions:
Real estate investments are explicitly excluded from this deduction, meaning no tax benefit applies to the purchase of real estate in the region.
Implications for foreigners
Law 4/2024 opens the door to numerous benefits for foreigners interested in settling in Madrid:
- Tax benefits: Reduce your tax burden in a favorable and stable economic environment.
- Investment opportunities: Encourage participation in the region’s business landscape.
- Appeal to entrepreneurs and professionals: Especially for those seeking a high quality of life and institutional support for business development.
Final considerations
Madrid strengthens its position as one of the most competitive regions in Europe with this new fiscal measure. If you are a foreigner considering moving to Madrid, this law offers not only significant economic incentives but also the chance to be part of a growing region with high-quality public services.
At ARC Legal, we are experts in advising our foreign clients on all legal aspects in Spain. If you have any questions or would like more information about this law, please don’t hesitate to contact us.