The IPSI is not a local VAT
Melilla is excluded from the territory in which Spanish VAT applies. What governs instead is the IPSI, the indirect tax on production, services and imports, a tax belonging to the Ciudad Autónoma which charges the importation of goods, the production or manufacture of goods in the territory and certain supplies of services, alongside supplementary charges on particular consumption. The rates, the exemptions and the cases outside its scope are set by the city through its tax by-laws, and that is why we do not reproduce them here: they are consulted in the by-law in force on the day the transaction takes place.
The underlying difference from VAT is not the rate, it is the structure: the IPSI does not work with the chained deduction logic of VAT, so the tax can end up absorbed into cost at some point in the chain. For anyone who buys abroad, transforms here and sells, that changes the selling price, not just the paperwork.
The income tax allowance and what is really examined
The personal income tax act provides an allowance against the tax due on certain income obtained in Melilla by those effectively resident in the city. We give neither the percentage nor the exact number of years of presence required: these figures have changed and they have to be read in the wording of the applicable article in force before being applied to a particular case. We would rather this page contained no figure than a wrong one.
What is constant is where the matter is decided. First, effective residence: registration on the padrón does not establish it by itself, and what is examined is real life — where you sleep, where your children study, where you spend, where your doctor sees you. Second, the source of the income, because the allowance does not reach income obtained in the city and income obtained outside it in the same way, and that nuance decides most of the assessments we have seen.
Changing the address on the register is a matter of minutes; showing that you live here is a matter of facts and of years. Anyone who does the first without the second is exposed to an inspection of every unexpired year, and the limitation period is four. We will tell you so before we start, even when it is the opposite of what you were hoping to hear.
Establishing a company here
We are asked this every week. The corporate income tax act provides an allowance against the tax due on income obtained in Ceuta and Melilla, subject to conditions of establishment and to the income genuinely being obtained through an activity carried on in the city. It is a legitimate incentive and it exists to be used.
That said, the warning is unavoidable: a company whose only connection with Melilla is a letterbox does not meet those conditions, and the authorities have the tools to tax the arrangement for what it really is. What is examined is substance — physical means, people, where decisions are taken — and not the address shown at the commercial registry. Where the project is real, the structure is studied and documented from day one. Where it is not, we say so and we do not build it. There is context in coming forward voluntarily.
What substance means is not settled by us or by you: it is settled by what can be shown — premises, people who work here, decisions taken here and recorded here. Where that exists it is documented and defended; where it does not, no amount of careful drafting supplies it.
Who writes to us from Melilla
| Who | What occupies them |
|---|---|
| Trader importing and selling in the city | IPSI on import, the applicable by-law and which part ends up absorbed into cost |
| Professional with mainland clients | Whether the invoice carries VAT, IPSI or neither, depending on the service and the customer |
| Resident with a salary here and investments elsewhere | Which income falls within the allowance and which does not |
| Company considering establishing itself here | The real conditions of the corporate tax allowance and what substance is needed |
| Someone who has just arrived for work | Building the evidence of effective residence from the first month |
Working with Melilla, remotely
From here, literally: this is the only one of our city pages where the office and the territory are the same place. That does not change how we work, which is still remote, in writing and at a fixed fee, with the figures shown to you before anything is filed.
One thing it does change: on IPSI and on the Melilla allowance we do not improvise from a mainland handbook. We work in Spanish, English and French, and we warn about risk whenever there is any, including when the prudent answer is less attractive than the one you were told somewhere else.
A Melilla consultant invoicing the mainland
A professional established in Melilla, with her office here, who in one year invoices 60,000 €: 40,000 € to companies on the mainland, 8,000 € to mainland private clients and 12,000 € to companies in the city. Since Melilla lies outside the Spanish VAT territory, each invoice is treated differently:
| Client | Amount | VAT | Income tax withholding |
|---|---|---|---|
| Mainland company | 40,000 € | She does not charge it: the company self-assesses it under the reverse charge | 15 %: 6,000 € |
| Mainland private client | 8,000 € | As a general rule no, because the service is located where the supplier is; there are special rules | No |
| Melilla company | 12,000 € | No | 15 %: 1,800 € |
| IPSI on each transaction | Whatever results from the City's fiscal by-law in force, checked service by service | ||
IPSI is the local indirect tax that Ceuta and Melilla levy instead of VAT. Income tax withholding, on the other hand, is that of any professional, because income tax is a national tax: 7,800 € over the year. Since more than 70 % of her income carries withholding, she does not file Modelo 130. And because the work is carried out here, her income counts as obtained in Melilla for the purposes of the income tax allowance, provided her residence is genuine.
That "here" has to be provable engagement by engagement. If part of the work is physically done on the mainland, with weeks of project work at the client's office, the part of the income obtained there may fall outside the allowance. Where each engagement is carried out is documented. And on the invoice to the mainland company it is worth stating that the recipient self-assesses the VAT under the reverse charge, because many clients do not know and find out in an audit.
If at some point the consultant works for a client in another EU country, the place of supply is analysed separately: being in Melilla, outside the Spanish VAT territory, does not mean being outside every obligation, and the client's country may have its own rules for self-assessing the service. On that we give no opinion on foreign law: we flag it and it is confirmed there.
What a Melilla professional files over the year
| When | What |
|---|---|
| As the IPSI by-law provides | The IPSI returns due for her services, before the Ciudad Autónoma, the city's own government |
| Quarterly | 111 if she has employees; for this activity there is, in principle, no 303 |
| January | Ask each business client for the withholding certificate |
| April to June | Income tax return with the allowance on the part of the tax corresponding to income obtained here |
The mechanics of the reverse charge are in the reverse charge, and if you practise here and want us to handle your numbers, the form is tell us about your business.
What almost nobody in Melilla asks until a client complains: the professional who arrives from the mainland and keeps using the usual invoice template adds 21 % VAT to every invoice. That VAT is wrongly charged. The client cannot deduct it, and whoever collected it has to issue corrected invoices and pay it back. The longer it goes on, the more invoices have to be redone. Checking the template on day one takes five minutes.