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Tax exemption – working in Gibraltar and living in Spain

Spanish income tax regulations exempt income up to 60.100€ a year on salaries earned by persons who work abroad.

Many expats benefit from the exemption because they have chosen to base their family life in Spain in order to benefit from its the most agreeable lifestyle and climate.

The wage earner might be working on contract in the Middle East, the North Sea or indeed elsewhere. Whilst they spend a lot of time with their families at home they are out of Spain for over 6 months a year. However, because their family home is in Spain they too will almost certainly be considered tax resident in Spain.

The rules that govern this generous exemption are described here.

One of the conditions of the exemption is that the country where a person works must not be classified as a tax haven. Consequently, the thousands of individuals who work in Gibraltar and live in Spain were automatically excluded from this exemption and, as a result, many were faced with an annual tax bill in Spain because Spanish income tax is usually higher than the income tax workers pay in Gibraltar under its Pay as You Earn system.

Spain provides a unilateral tax credit when tax is paid in another country but the tax credit is not usually enough to cover 100% of the Spanish tax bill, hence many have had to pay more.

Gibraltar and Spain have been cooperating very closely on tax matters for several years and as a result many workers who had not paid tax in Spain received very unwelcome tax assessments from the Spanish tax office.

This is all about to change soon because Gibraltar and Spain signed a tax agreement that came into effect on the 4 March 2021. A country that has signed a tax treaty with Spain is removed from the list of tax havens.

However, Spanish regulations concerning tax havens require that the tax office actually removes a country from the official list of tax havens, but this has not happened yet in the case of Gibraltar. This is not unusual and it is just a question of time before the tax office gets around to dealing with this formality. This is expected at any time and, as in previous occasions, the effective date will be backdated to the date that the tax treaty came in force, i.e. 4 March 2021.

So, with any luck any salary payment received by a Spanish resident from Gibraltar employment will be tax exempt in Spain, up to the limit of 60.100€ Euros in the year for salary payments received from 4 March 2021 onwards.

This is great news for Gibraltar cross border workers but don’t celebrate yet as the Spanish tax office still has to remove Gibraltar from the list of tax havens.

Spence Clarke & Co specialises in the provision of Spanish tax, legal, audit and accountancy services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.