The Spanish income tax system provides a generous tax free regime for persons who are resident in Spain but work abroad for part or all of the year.
Individuals are allowed up to 60.100 euros tax free income subject to the following conditions:
- That the person is tax resident in Spain, i.e. has habitual residence in Spain.
- Work is effectively carried out outside of Spain for a non Spanish employer and is not carried out in a tax haven.
- That the employer is tax resident in a non-tax haven country that applies a tax similar to Spanish income tax. This condition is considered satisfied if Spain has signed a double tax treaty with that country, but absent this, other forms of proof may be admitted.
- There is no effective minimum taxation requirement for the other country to apply, with the result that income tax charged by the other country can be effectively zero.
In the case of qualifying foreign income that exceeds the 60.100 euros limit, the deduction applies up to the limit, leaving the excess income subject to income tax in the normal manner.
Tax paid in the foreign country is available as a tax credit in Spain but only as a credit against Spanish income tax applicable to income from the same source that has exceeded the 60.100 euros limit.
The exempted income is not included in the progressive income calculation for the purposes of determining the tax rates applicable to other sources of income. In other words, exempted income is not considered to exist with the result that any excess of income over the limit of 60.100 euros or income from other sources will be subject to the lowest income tax rates available to the individual.
It is important to understand that a person whose only home is in Spain is regarded as tax resident in Spain and is required to file a Spanish income tax declaration. It is often incorrectly thought that if a person’s only sources of income arise from non-Spanish sources then there is no obligation to file Spanish income tax declarations.