The law was approved in 2002 to make hiring foreign high-earners in all fields easier, and to make Spain more attractive to the specially qualified or skilled.
The new measure, to be implemented on 1 January, will not affect foreign players already in Spain such as Real's Cristiano Ronaldo and Kaka or Barcelona's Zlatan Ibrahimovic and Lionel Messi.
The LFP's assembly will meet on Friday to decide what action to take, with a players' strike one of the options.
President Jose Luis Astiazaran told TV channel Telecinco: "The (current) special tax regime has allowed star players to join our league which benefits both the fans and the public coffers."
Barcelona president Joan Laporta also condemned the government's move, saying it should have consulted those affected more thoroughly before acting.
"This measure damages Spanish football," he told Barca's website. "It would mean that talented players will think twice before coming to our league."
I think that we all should be playing by the same (tax) rules
Real Madrid skipper Raul
The ruling Socialist Party's spokesman in parliament, Jose Antonio Alonso, said the change in the law was simply an attempt to level the playing field in difficult times.
"(This is) an exercise in tax justice, aimed at promoting tax equality at a time of serious economic crisis," he said.
"Foreign footballers... have to pay their taxes just like everyone else."
The government's stance has been backed by Real Madrid skipper Raul who said: "I think that we all should be playing by the same (tax) rules."
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