As international recruitment becomes increasingly common, Spanish businesses may hire employees who have recently moved to Spain or who are not yet considered Spanish tax residents.
In these situations, the employer cannot automatically apply the standard Spanish payroll withholding used for ordinary resident employees. The correct treatment will normally depend on the employee’s tax position for the relevant calendar year and where the employment duties are physically carried out.
Applying the wrong withholding regime may result in incorrect payroll calculations, tax returns being submitted through the wrong forms and subsequent corrections being required.
Spanish tax resident employees
Employees who are Spanish tax resident under the ordinary rules are generally subject to payroll withholding under the Spanish Personal Income Tax system, known as IRPF.
The withholding rate is calculated according to factors including the employee’s estimated annual salary and their personal and family circumstances. The employer reports these withholdings through form 111 and the corresponding annual form 190.
Tax residence is determined separately for each calendar year. An immigration permit, Spanish address or employment contract does not necessarily establish the employee’s tax residence.
The rules used to determine whether an individual is Spanish tax resident are covered in more detail in our article in this respect.
Non-resident employees working in Spain
An employee who is not Spanish tax resident may still be taxable in Spain if they physically perform their employment duties here.
Under Spanish Non-Resident Income Tax rules, employment income is generally considered to arise in Spain when it derives from work carried out in Spanish territory. The fact that the employee remains tax resident in another country does not, by itself, prevent Spain from taxing that salary.
The salary will normally be subject to Non-Resident Income Tax, known as IRNR, unless the relevant double taxation treaty provides otherwise.
The general IRNR rate is 24%. A reduced rate of 19% may apply where the employee is resident in another European Union country or in a qualifying European Economic Area country.
IRNR withholding is normally reported through form 216 and included in the annual form 296. It should not simply be included with ordinary resident employee withholding in forms 111 and 190.
The employer should also review the relevant double taxation treaty. However, where the employee is working in Spain directly for a Spanish employer, Spain will commonly retain the right to tax the salary even if the employee spends fewer than 183 days here.
Employees starting work in Spain during the second half of the year
A particularly common situation arises where an employee moves to Spain and starts working for a Spanish company during the second half of the calendar year.
Spain does not generally apply a split-year residence system. The employee is normally treated as either resident or non-resident for the whole calendar year.
Therefore, where the employee arrives sufficiently late in the year and does not meet any of the other Spanish tax residence criteria, they will generally remain non-resident for the entire year of arrival. Their salary for work performed in Spain during that period should normally be subject to IRNR withholding.
If the employee remains in Spain, they will usually become Spanish tax resident for the following calendar year. The employer should then change the payroll treatment from IRNR to ordinary IRPF withholding from 1 January.
For example, an employee who moves to Spain and starts working for a Spanish company in September may be subject to IRNR on their salary from September to December. If they continue living and working in Spain, they would normally be included under the ordinary IRPF payroll system from 1 January of the following year.
The position should therefore be reviewed before the first salary payment and again before the January payroll is processed.
Employees under the Beckham regime
Certain employees moving to Spain may qualify for the special tax regime commonly known as the Beckham regime.
Although this regime uses some rules derived from the Non-Resident Income Tax legislation, an employee applying the regime should not be treated as an ordinary non-resident. A specific payroll withholding treatment applies.
The eligibility requirements, application process and tax consequences are explained in our separate article.
Other international working arrangements
Less commonly, an employee of a Spanish company may perform all their duties from another country or divide their working time between Spain and several jurisdictions.
These arrangements require a separate review, as Spanish withholding may not apply to work performed entirely abroad and the employer may instead have payroll, tax or social security obligations in the country where the employee works.
The same applies where an existing employee permanently moves into or out of Spain. Payroll treatment should be reviewed whenever there is a material change in their country of residence or physical working location.
Tax withholding and social security are separate issues
The tax withholding position should not be confused with the employee’s social security treatment.
An employee may be subject to Spanish income tax while remaining covered by another country’s social security system, for example under an A1 certificate. Equally, the fact that Spanish social security contributions are being paid does not necessarily confirm that ordinary IRPF withholding is correct.
Both issues should be reviewed separately when an international employee is hired.
Final thoughts
The fact that an employee works for a Spanish company does not necessarily mean that ordinary IRPF withholding should apply from the first day of employment.
A Spanish tax resident employee will normally be included under the IRPF payroll system, while a non-resident employee carrying out their duties in Spain will generally be subject to IRNR withholding.
Particular attention should be given to employees who start working in Spain during the second half of the year. They may need to be treated as non-residents during the year of arrival, with payroll changing to IRPF from 1 January of the following year.
Establishing the correct treatment before processing the first salary payment is considerably easier than correcting several months of payroll and withholding tax returns afterwards.
