Establishing where you are a resident for tax purposes can be more complex than you think, especially if you spend time in both Spain and another country. However, it is important to determine this early on, so you can make sure you are registered and paying the right taxes in the right country. If not, sorting it out later could prove complex and costly. You also need certainty over your tax residence before you can put effective tax planning solutions in place.
It is surprising how many people pay tax in the wrong country. Some people think they are not liable to taxes in Spain when in fact they are. Others believe they are resident in Spain when they are actually tax resident elsewhere. Others may be trying to use the rules to their advantage but get it wrong.
And now, with automatic exchange of information taking place globally under the Common Reporting Standard, it is vital you ascertain where you are tax resident and pay taxes accordingly. For peace of mind, make sure your affairs are in order sooner rather than later.
A cautionary tale – Shakira’s unexpected €20 million Spanish tax bill
While most of us can only dream of earnings on the level of Columbian singer Shakira, this is a good example of the risks of getting your tax residence wrong.
According to reports, Shakira has paid €20 million in tax to the Spanish tax authorities after they ruled she was resident in Spain in 2011. This means she has to pay Spanish tax on her worldwide income. According to El Periódico, she paid the tax bill to enable her to lodge an appeal. She is still under investigation for fiscal years 2012 to 2014.
Shakira officially became resident in Spain in 2015 and believes she was non-resident for the years 2011 to 2014, therefore only liable for tax on the income she earned in Spain. She alleged she spent most of her time outside Spain and that her tax residency was in the Bahamas during these years. However, the tax authority’s case is that she was a de facto resident for those years after carrying out an investigation which included interviews with neighbours, her hairdressers, etc. Her partner since 2010, and father of her children (born in 2013 and 2015) who live in Spain, is FC Barcelona footballer Gerald Piqué.
This case is still ongoing (it is reported she has appealed) and so the final result may change, but this does demonstrate why it is important to take specialist advice and make sure you get your tax residence right.
Last year the Spanish authorities confirmed they are using information received under the Common Reporting Standard to check if high net worth individuals are paying tax correctly in Spain. They are also cracking down on people who do not register for tax purposes in Spain, when in fact they meet the residency criteria. They gather information such as utility bills, arrivals and departures, home security footage, memberships to gyms, clubs, etc.
The Spanish tax residence rules
You are resident for tax purposes in Spain if any of the following apply:
1) You spend more than 183 days in Spain cumulatively in a calendar year, whether or not you are formally registered. Temporary or sporadic absences are ignored for the purpose of this rule unless you can prove you are habitually resident in another country for over 183 days.
2) Your “centre of economic interests” is in Spain– i.e. the base for your economic or professional activities is in Spain. If you earn more income or have more assets here than in any other single country, Spain will be deemed the centre of economic activity,
3) Your “centre of vital interests” is in Spain – i.e. your spouse lives here and/or your dependent minor children. In this case you are presumed Spanish resident, even if you spend less than 183 days here, unless you can prove otherwise.
There is no split-year treatment in Spain; you are either resident or non-resident for the whole fiscal year.
It can be possible to fulfil the domestic tax residency rules of two different countries (i.e. Spain and UK). In that case, the double taxation agreement will set out a list of ‘tie-breaker’ rules to establish in which country the individual should be paying taxes, as it cannot be both. These look at criteria like the location of the permanent home, centre of vital interests and habitual abode. If these do not determine residence it comes down to nationality (or mutual agreement if a national of neither country).
Your tax liabilities as a Spanish resident
If you are a resident of Spain, you are liable for income, capital gains and wealth taxes on your worldwide income and assets and subject to Spanish succession and gift tax rules. This is in addition to incidental tax liabilities such as IVA (‘VAT’) and other local taxes.
Spanish resident taxpayers may also have to submit an informative declaration of assets located outside Spain (Modelo 720) where the value exceeds €50,000.
Brexit and residency
Registering as resident in Spain and being tax resident are two separate issues. However, with the Brexit clock ticking, this is a good opportunity to remind UK nationals who wish to live in Mallorca that they need to sort out their residence if they have not already done so. We do not yet know what the rules will be for those arriving after Brexit.
The UK and EU have agreed to maintain existing residency rights and benefits for citizens who are “lawfully residing” in the country at the Brexit cut-off date, scheduled for 29th March 2019.
If you have been in Spain for five continuous years you can apply for permanent residence. Those who have been here less, or are new arrivals, are advised to register at their local police station to ensure their position is formally recorded at the Registro Central de Extranjeros and also on the electoral roll and census (Padrón Municipal) at your local town hall.
The Spanish taxation regime may not be as taxing as you think, especially for retirees with investment capital. There are compliant tax-efficient arrangements available that can make a considerable difference to how much tax you pay. Seek specialist, personalised advice. Blevins Franks has been advising expatriates in Spain for 40 years, with an office in the Balearic Islands for 20 years.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
To keep in touch with the latest developments in the offshore world, check out the latest news on Blevins Franks Tax & Wealth Management Specialists.
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This article was written on the 26th of March, 2018.