Relocating to Spain (Part III)

In his final article of this series, Fernando del Canto, Barrister, looks at how the Spanish Government have tried to make relocating to Spain more attractive to foreign nationals.

Introduction

As discussed in our previous articles, 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 their tax position 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 special tax residence regime for international executives

The Spanish government, being aware of the unattractive tax regime offered to international executives and employees, and the limitations to attracting foreign investment, passed new legislation to promote a greater influx of 'impatriados'. In broad terms, the only taxable income for the individuals applying for this regime will be the income generated in Spain. The tax rate is a flat 24% and no allowances are applicable.

The new legislation can be explained to the UK adviser in the context of the resident but not ordinarily resident regime in the UK, applicable to foreign income and capital gains. The main noticeable difference is that remittance of foreign income in the Spanish regulation is not considered a taxable factor and the scope to be treated as not ordinarily resident extends up to five full tax years in Spain.

Section 9.5 of the Spanish Income Tax Act (TRLIRPF) could be translated as follows:

9.5. Those individuals obtaining their tax residence in Spain as a consequence of moving to Spanish territory could opt to pay their taxes either according to the Income Tax Act for Spanish Residents (TRLIRPF) or to the Non Resident Tax Act (TRLIRNR) during the tax year when the change of residence occurs and the subsequent five tax years, if the following conditions are met:

• They have not been residents in Spain for the previous 10 years to their moving into Spanish territory.
• They move to Spanish territory as a consequence of an employment contract.
• The duties of employment are actually performed in Spain
• The works are rendered for a Spanish-resident company or entity or for a non-resident company with permanent establishment in Spain.
• The employment income is not exempt from taxation according to the Non Residents Income Tax Act
• The taxpayer choosing to pay taxes as a non-resident will be liable to Wealth Tax (LIP) in relation to the assets located in Spain.
• The Chancellor of the Exchequer (Ministerio de Hacienda) will establish the procedure to implement the above-mentioned option.

Section 9.5 is self-explanatory in terms of the main requirements applicable to the new tax regime. To complete the statutory references, I would like to mention that on 10 June 2005, the Spanish Parliament passed new legislation, introducing sections 111-118 to the Regulations of the Income Tax Act (RIRPF) (RD 1775/2004 de 30 de Julio. Reglamento del Impuesto sobre la Renta de las Personas Fisicas (RIRPF). Sections 111-118 introduced by RD 687/2005 de 10 de Junio), which further explain the implementation of this legislation. The Chancellor of the Exchequer and the Parliament are likely to keep refining the legislation to make it clearer and we shall need to keep on top of the Tax Office opinion and upcoming case law, which the application of this regime will generate and which will keep the profession alive.

Investment Income

The Spanish parliament passed legislation on 1 January 2007, introducing a flat tax rate of 18% for residents and non-residents alike applicable to investment income, which includes dividends, interest and capital gains.

Summary

To finalise this series of articles I would like to highlight that deciding whether or not to become Spanish resident and if so, under which regime will depend on many factors, and in particular the intention of the person as well as the type of income.

Article Added Saturday, 24 January 2009

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