Relocating to Spain (Part II)

Fernando del Canto, Barrister, continues his outline of the Spanish tax system by looking at the tax rules for residence in Spain.  

Introduction

In the previous article we introduced the importance of a good understanding of the Spanish residence system as compared with the UK. In this article we are going to consider the specific criteria to be satisfied according to Spanish Tax Law, in order to be considered tax resident in Spain.

The Spanish Tax Residence criteria

Under Spanish domestic law, and its Double Tax Treaty network, individuals are deemed resident for tax purposes in Spain according to the following criteria:

1. The 183 days rule: For Income Tax purposes if the individual spends 183 or more days in Spain during the Spanish tax year, ending 31 December. An individual will be treated as resident for Spanish Inheritance Tax if 183 days have elapsed since they first took up residence. Temporary absences from Spain are not counted to reduce the tally for  the 183 days rule, unless the individual is able to prove his tax residence in a country with a Double Tax Treaty with Spain.
2. Spain is the centre of economic interest or the principal place of professional activity: To be deemed resident under these criteria, the Spanish Tax Agency (Agencia Estatal de Administración Tributaria or AEAT) will look at where the individual’s investments are located. They will also look at where the income is derived from as well as whether the source is employment, business or investment income.  To determine the place of professional activity the Tax Agency looks at the country where the individual spends most of his time involved in his professional activity (the principal activity).

   There are other elements being used by the Spanish Tax Agency to determine residence, such as:

3. The location of the family home: this is the place where the individual and his/her family live on a habitual basis. If the spouse and children live in Spain there is a presumption of residence in Spain.
4. Residence in territories considered Tax Havens by the Spanish Government: There are more stringent rules in respect of probing the residence in a country regarded by the Spanish Tax Agency as a Tax Haven, including Gibraltar, The Isle of Man, The Channel Islands, The British Virgin Islands, Malta and several other offshore jurisdictions, as determined by the Spanish Royal Decree 1080/1991.

If there is a conflict in determining residence according to the above criteria, the Tax Authorities would determine where the individual’s investments are located and where their income is derived from, and whether the source is employment, business income, or investment income in Spain. In the event of residence disputes with other countries, the international Tax Treaties take precedence over domestic rules of residence.

Summary

In summary, according to the general tax residence regime, the Spanish resident will be taxed on all his worldwide income, gains or assets. Obviously this is not very favorable 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. 

The concepts of Domicile in the UK, as well as special tax residence domestic rules and anti-avoidance schemes in those countries, will need to be considered together with the above.

In the next article we will consider new legislation that the Spanish Parliament has announced to make relocating to Spain a more attractive proposition.

Article Added Saturday, 17 January 2009

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