Relocating to Spain (Part I)

In the first of three articles, Fernando del Canto, Barrister, outlines some of the tax issues facing UK individuals who relocate to Spain.

Introduction

In my tax practice the international element has been and still is “the exotic ingredient” to be added to the classic tax residence, domicile or citizenship pot. This is particularly true when dealing with UK clients relocating to Spain.

For most clients the mixture of those concepts was distilled carefully by their accountant to provide an appropriated tax planning formula.

The client leaves the UK for pastures new, and after establishing his residence in Spain he is confronted with the Spanish tax residence concept. For many people this comes as a surprise, i.e., a new concept to add extra complexity to the apparently resolved international tax puzzle. Questions such as: How and when do I become tax resident in Spain? Which forms or returns do I need to file in Spain?  Do I need to keep filing my tax returns at home? What about tax allowances? How do I Include my overseas income in my return? What are my tax obligations in Spain? Etc.

Here in Spain I find many people, including professional advisers, who cannot determine with clarity when an individual is or is not resident, what are the tax consequences in Spain and in the country of origin, and most importantly, what should be the next move to clarify the situation. If getting verbal clarity is difficult, I have found very few people venturing to give a written response.

In this series of articles to be published by Taxationweb, I will try to explain the notion of Spanish tax residence, without underestimating the importance of getting a professional opinion for each particular case.

The Spanish residence system

Spain generally applies a residence-based tax system, as opposed to a system based on citizenship or domicile. The concept of "Tax domicile", as understood in English Law, does not exist in Spain.

The tax residence approach determines that all worldwide income or gains are taxable in Spain for the Spanish resident, even if they have not been remitted to Spain. Spanish income tax returns should report the income of the taxpayer, spouse and dependants, although each member or the family may file independent tax returns.

Non-Residents 

Spanish Non-Residents have got their own tax status and are liable to taxes in some circumstances, such as income received in Spain from a Spanish source and capital gains or investment income arising in Spain among others. A unique feature of the Spanish system is that owning property in Spain by non-residents is also a taxable event. This is regulated in the Non-Resident Tax Act.

Wealth Tax

The Wealth Tax system has been officially abolished from the tax year starting 1st January 2007.

Inheritance Tax

As regards the Spanish Inheritance Tax system, Spanish tax residence will determine that all the worldwide assets of the resident will be subject to Spanish Inheritance Tax.

Summary

In summary, according to the general tax residence regime, the Spanish resident will be taxed on all his worldwide income, gains and estate.

This may not seem very favourable as many people wanting to relocate to Spain would prefer to optimise tax and keep protecting assets and investments sheltered in other jurisdictions. International movers, if given the choice, will opt for those countries where lower tax rates and tax-exempted foreign income, gains and assets are applicable.

[In his next two articles, Fernando will review the general rules governing Spanish residence, and recent developments that should make Spain more attractive as a relocation prospect - Ed.]

Article Added Saturday, 10 January 2009

Your attention is drawn to the disclaimer on this site, which applies to the content in this section.