We would all prefer to pay less tax, but before you can start on any tax planning exercise you have to establish where you are resident for tax purposes. For some people this is straightforward, but the rules can actually be quite complex and there are many situations where the answer is not clear cut.
It is surprising how many people pay tax in the wrong country. Some think they are not liable to taxes in Spain when in fact they are resident here for tax purposes. Others believe they are resident in Spain when they are UK resident and should be paying tax there. Others may be trying to use the rules to their advantage, to avoid paying tax in a particular country, but are getting it wrong.
It has always been important to establish where you should be paying tax and fulfil your obligations under local tax law. However, now that automatic exchange of information is in place and with the Modelo 720 still in force, it is vital you ascertain whether or not you are tax resident here and consider all the tax implications this involves.
Spain’s residence rules
If you are a resident of Spain, you are liable for income, capital gains and wealth taxes on your worldwide assets and subject to the Spanish succession and gift tax rules. You will generally have to submit annual income and wealth tax returns, as well as Modelo 720 where you declare overseas assets over €50,000.
There are three situations that could make you resident in Spain for tax purposes.
The most well-known rule is the ‘183 days’ one. If you spend more than 183 days in Spain in a calendar year, you become Spanish resident whether or not you take out a formal residence permit. These days do not have to be consecutive. Additionally, temporary or sporadic absences from Spain are ignored unless you can prove that you are habitually resident in another country for more than 183 days – i.e. you would need a tax residence certificate from that country.
Even if you spend less than 183 days a year in Spain, you are resident for tax purposes if your ‘centre of economic interests’ is in Spain. This is if the base of your economic and/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 and you will be considered resident.
You will also be considered resident of Spain if your ‘centre of vital interests’ is here. So if your spouse and/or your dependent children live in Spain, you are presumed Spanish tax resident even if you live and work in another country. This is applicable unless you can prove otherwise – i.e. if you can obtain a tax residency certificate in another country this presumption will not apply.
Also, if you live on a boat within 12 nautical miles of Spain, you are a Spanish tax resident.
There is no split-year treatment in Spain; you are either resident or non-resident for the whole year. If you arrive during the first six months, with the intention of living here permanently, you are likely to be regarded as resident for the whole year. If you arrive in the latter half of the year, you will probably be non-resident until the following year, but this can depend on previous visits to Spain so you need to be careful.
Double taxation agreements
It can be possible to fulfil the domestic tax residency rules of two different countries. For example, the UK’s Statutory Residence Test makes it harder, in some circumstances, to become non-UK resident than some people realise.
A double taxation agreement between two countries, such as the one between Spain and the UK, sets out a list of ‘tie-breaker’ rules to establish which country the individual should be paying taxes in. 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 the individual is a national of neither country.
Tax residence audit
The Spanish authorities are cracking down on people who do not register for and pay taxes in Spain, when in fact they meet one of the residency criteria. They gather information to prove an individual is or was resident, such as utility bills, arrivals and departures in Spain, home security footage, Social Security paid to employees etc. Audits on residence may be carried out when someone dies in Spain; when they take part in a significant transaction like selling a property or a company, and when they move to a country that offers a tax break. They will also do this if something suspicious shows up on the information they receive from abroad under the new automatic exchange of information regime.
It is therefore essential you get your residency right and fulfil tax obligations as necessary.
Cross-border taxation can be very complicated. Your tax planning needs to take the rules of all the related countries into account and the interaction between them. Take specialist advice to establish the most tax-efficient solutions for your personal situation.
If Spanish taxation is a concern for you, contact the Spanish tax specialists at Blevins Franks. They will confirm your tax residence position and review your current tax planning and the way you own your assets to see if you can use Spanish compliant arrangements to reduce your tax liabilities. Blevins Franks has saved its clients a substantial amount of tax over the years.
Blevins Franks has decades of experience advising expatriates in Spain. Its team has in-depth knowledge of Spanish taxation and specialise in reducing tax on invested capital, pensions, wealth and inheritance.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written in March 2016.