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Spain: New tax incentives, sectoral pension and funding options

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By Pilar Garcia-Aguilera | July 12, 2022

Effective July 2, a new law in Spain to boost retirement plan participation provides new employer tax breaks and relaxes employee plan contribution limits.

Employer Action Code: Act

Law 12/2022, published on July 1, 2022, and effective one day later, provides new employer tax breaks and relaxes employee contribution limits within all tax-qualified pension plans. It also establishes the regulatory framework for new sectoral tax-qualified Simplified Employment Pension Plans (Planes de Pensiones de Empleo Simplificados – PPES) as well as for a new type of pension fund — the Publicly Promoted Employment Pension Fund (Fondo de Pensiones de Empleo de Promoción Pública Abierto – FPEPP). It is intended to dramatically increase the number of workers who participate in employer retirement arrangements — from two million today to 13 million by the end of the decade.

Key details

Changes applicable to all tax-qualified plans include (effective January 2023 unless noted otherwise):

  • Employer social security contributions will be reduced by the amount of their plan contributions, up to certain limits.
  • In addition to the standard tax-deductibility of employer contributions, employers will receive a further deduction equal to 10% of their plan contributions made for employees earning up to 27,000 euros per year (and proportionally for those earning in excess).
  • Currently, the per-employee cap on total employer/employee contributions is €1,500, plus up to €8,500 of contributions if made by the employer or by the employee in an amount no more than total employer contributions. The same base €1,500 and additional €8,500 component caps will still apply, but employees earning under €60,000 per year may contribute more than the employer depending on the size of the employer contribution.
  • Effective immediately, the maximum waiting period before an employee can participate in the plan is changed to one month. Plans with longer waiting periods should adapt their rules to comply with the new legislation.

Simplified employment pension plan (PPES)

  • A PPES is a new type of defined contribution (DC) retirement plan, with a streamlined implementation process, that may be established as a common sector-wide occupational plan by a collective bargaining agreement (CBA), as a general plan for public employees, or for the benefit of the self-employed (via professional associations). Where plans are established, provisions must be identical for all entities participating in a specific PPES.
  • PPESs may be funded via existing tax-favored vehicles or the new FPEPP.

Publicly promoted employment pension fund (FPEPP)

  • FPEPPs will be offered and managed by private financial institutions, subject to approval and regulation by the government, and will share a common digital platform. A cap on management costs (to be stipulated in future regulations) will apply.
  • FPEPP assets must be invested exclusively in the interest of the participants, taking into account the profitability, risk and social impact of the investments, including non-financial risks and environmental, social and corporate governance criteria (in accordance with the European Union sustainable investment rules).

Implications

While further detailed regulations are expected, employers should review the effects of the changes regarding their existing plans, and consider the opportunities and suitability of the new funding option and potential simplified sectoral arrangement. Over 80% of the labor force are covered by CBAs, most of which (about three-quarters) are enterprise agreements; however, unlike other European economies (e.g., France and Italy, where much of the workforce are also covered by CBAs), agreements in Spain do not commonly require the provision of retirement benefits, due in part to the dominant role played by enterprise rather than sectoral agreements.

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Pilar Garcia-Aguilera

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