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The rules for tax residency in Spain – conflict with residencia rules?

The end of the Brexit Withdrawal Agreement has caused many British citizens to apply for formal permission to live in Spain (permiso de residencia). This is also known as applying for the TIE (tarjeta de identificación de extranjeros).

Any non Spanish person who wants to spend more than 90 days in Spain during a six month period is required to apply for the permiso de residencia. In practice, many EU/EEA residents do not bother with this formality given the freedom of movement rights provided by the Schengen agreement. To date, this has caused no difficulties in Spain.

It is the loss of the EU citizen rights that has caused so many Brits to apply for residencia to protect their unrestricted rights to live in Spain.

Applying for residencia has inevitably caused individuals to reconsider their tax situation, especially as one of the requirements of the process is to register with the local town hall as a resident, a process known as empadronamiento.

It is widely thought that having a permiso de residencia is synonymous with being tax resident.

This is incorrect as the rules for tax residence and residencia are quite different.

Spanish tax residency rules

These are contained in articles 8 and 9 of income tax law (Ley 35/2006, de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas).

Article 8 is very simple, essentially it states that a person shall be subject to Spanish income tax if their habitual residence is in Spain.

So, lets forget all the complicated rules that follow in Article 9. If your only home is in Spain, there is no doubt that you are a Spanish tax resident and you should pay Spanish income tax (and if applicable wealth tax and inheritance/gift tax).

Article 9 deals with all the other possibilities, for example in the case that a person has more than one ‘habitual residence’.

This is where the best known tax residency concept of ‘183 days’ comes in.

  1. Article 9 states that if a person is physically present more than 183 days in a calendar year, they are considered as a tax resident of Spain.
  2. But article 9 also has the effect that a person is tax resident if physically present less than 183 days in a calendar year, in the case that the centre of family or economic interests is in Spain.
  3. And, also in the case that a person’s spouse and minor children live in Spain and are financially dependant on that person.

However, if a person can prove that they pay income tax in another country then 2 and 3 may be rebutted. To prove this, it is usually necessary to supply a certificate of tax residence from that country.

Claiming tax residence in a tax haven is problematical. In the case of a country considered by Spain to be a tax haven, there is another requirement. You must be able to prove physical presence in that country for 183 days in the calendar year.

By the way, a day of presence in Spain (or wherever else) is regarded to be where you have stayed overnight.

Double tax treaties

These bilateral tax agreements (Spain has about 100) are designed to decide in which country a person should pay income tax and the rules vary according to the different kinds of income, employment, directors fees, dividends, property rentals, interest etc.

Additionally, the treaties always contain a section to fix where a person is tax resident. These rules rank ahead of a country’s own tax residence rules.

Consequently, the rules defined in articles 8 and 9 of Spain’s income tax law have to be read in conjunction with the tax treaty residency rules. For example: Where a person is considered tax resident in the UK as well as Spain, the tax treaty deals with the problem with ‘tie breakers’ that decide which country shall have the right to treat the person as a tax resident. A rarity, I admit, but this section of the tax treaties (they are all very similar in this case) is really quite easy to understand, so I have quoted below the actual text:

  1. he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
  2. if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
  3. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
  4. if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

An habitual abode is any place that a person has the right to reside, whether rented, owned or provided by family or friends. (One might ask what one does if one is a she…….this is very old tax law).

In practice, number 4 is very rare.

In conclusion

From reading these notes it will be very apparent that the ‘permiso de residencia’ rules have little to do with tax residency rules. Indeed, permiso de residencia and empadronamiento are completely ignored by articles 8 and 9 of income tax law.

It is possible to have a permiso de residencia but remain non tax resident in Spain. Imagine a person who arrives in Spain on 1 August 2020 and leaves on 31 May 2021. The person would reside in Spain for 10 months and certainly be required to have a permiso de residencia, but having spent only 5 months in Spain in either year, they would not be considered tax resident, assuming of course, they are paying tax elsewhere.

Obviously, having this is indicative of tax residence but as long as a person can prove:

  • being in Spain for less than 183 in a calendar year, and
  • being tax resident in another non-tax haven country,

a tax inspector will normally accept that the person is tax resident in the other country, regardless of the the permiso de residencia and empadronamiento formalities.

Case histories

Franz and Heidi are German nationals living in Spain off their pensions and savings. They sold their home in Frankfurt and used the proceeds to buy an apartment in Nerja. They pay income tax in Germany by deduction from their pensions and so they don’t think that they have to pay tax in Spain. Apart from the state pension, their pensions come from their previous employment by businesses.

Unfortunately Franz and Heidi are wrong and it is just a question of time before they get an unwelcome letter from the AEAT, the Spanish tax administration. They should only be paying income tax in Spain, as the Spanish/German tax treaty specifies. The best thing they can do is to file the last four years tax declarations in Spain voluntarily and then reclaim the tax paid in Germany. When they file in Spain they can apply to pay their tax in instalments to help finance the time it will take for the repayment of German income tax.

Jim has a wife and two children and a home in Alicante and works in the oil extraction business in a middle east country. He spends at least 9 months out of Spain each year. The country he works in has a tax treaty with Spain but it only applies to nationals and not visiting workers. In any case the country where he works does not charge any income tax on his pay.

He is definitely tax resident in Spain because:

  • his family home is in Spain
  • he is not tax resident in another country

Lisa has a home in San Roque and works in Gibraltar. Gibraltar applies income tax and social security deductions to her salary.

Lisa lives in Spain so she must pay Spanish income tax. She will be able to deduct her social security contributions from her taxable income and her Spanish income tax will be reduced by the tax paid in Gibraltar.

John and Mary have a holiday home in the Cadiz province and usually spend four or five months in Spain each year. They have a home in the UK and pay income tax in the UK on their state, private pensions and investments. They were caught in Spain in March 2020 and as a result of the lockdown they were not able to travel back to the UK when they originally planned and have spent more than 183 days in Spain in 2020.

John and Mary are certainly tax resident in Spain in 2020 and they should file income tax returns for the 2020 calendar year. They should also inform the UK tax office that they were not resident in the UK for the same period. If they pay income tax in the UK, they will do so incorrectly and Spain will not give them a tax credit for tax paid. As a result they will pay income tax twice on the same income.

The OECD recommended to its member countries that they should modify their tax rules to exempt people who were forced to remain in the country and as a result have become accidentally tax resident. Spain has ignored this recommendation although many other countries have made special provisions.

To make it worse, the tax office issued a ruling in the summer of 2020 that explicitly stated that no allowance would be made for persons who have spent more time in Spain due to Covid-19.

I know, the compassion of the Spanish tax authorities is astounding.

Peter is a registered resident of Bermuda where he has a home and stays for about four months each year. He also has a home in Marbella were he spends no more than four months a year. He has an apartment in London where he is very careful to spend no more than five weeks. He also travels extensively usually spending months in Switzerland, where he stays in various ski resorts renting apartments.

Peter has a potentially serious problem, despite his enviable circumstances. He believes he is being very careful avoiding tax residence in the UK and Spain, but he has got it wrong. He is relying on the widely known 183 day rule to avoid being tax resident in Spain. However, Spain regards Bermuda as a tax haven and so will not accept Peter’s claim that he is a Bermuda tax resident unless he can prove that he been physically present in Bermuda for at least 183 days each calendar year. Peter is at risk of having to pay income and probably wealth tax in Spain on his worldwide income and wealth.

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.