International tax barrister Leon Fernando Del Canto outlines the Spanish tax residence rules so that advisers’ can ensure that their clients aren’t caught off-guard when completing their tax returns after Brexit
For many high-net-worth individuals (HNWIs) and UK business owners, travelling between the UK and Spain has become almost like commuting. Over a million UK nationals own second homes in Spain, as it remains the number one destination for wealthy individuals to spend time in, and to invest in. Spain’s favourable climate and financial opportunities are highly attractive. However, an important tax year is drawing to a close, and financial advisers must be aware of the added complexities this past year has presented people with.
This is the first tax return season post-Brexit and since the pandemic began – two things which have significantly changed peoples’ travel, work and residency patterns. As such, these will have impacted many clients’ tax residency position – not least those who got caught up under pandemic lockdown rules and therefore infringed on the new post-Brexit immigration rules.
In the UK, (domiciled rules aside) the Statutory Residency Test (SRT) must be completed to assess whether clients are UK tax residents. An important consideration that many do not think about concerns ‘residence, remittance basis, etc.’ in cases where, either: the client was not a resident in Spain; or not domiciled in the UK and claiming the remittance basis; or else has dual residency in the UK and other country.
When filling out the tax return form, many advisers erroneously assume that the double tax treaty rules are automatically applied, but in actual fact the Spanish tax authorities often challenge the residency position. While the SRT makes clear the UK rules that will be followed by HMRC when counting days for residency purposes, those who work remotely from Spain must lay out the following: where was their time spent exactly; how it was spent; was business conducted; if so, for what purpose; how many days did they work there for; and how was the work done.
Given the financial implications of Spanish tax residence, it is unsurprising that we are seeing a spike in HNWIs applying for one of the many Spanish visa options available for gaining residency in Spain. Post-Brexit rules state that no more than 90 out of 183 consecutive days be spent in Spain without having a visa. Most visas require staying in Spain for over 183 days, meaning that those applying that meet all other residency requirements could become Spanish tax residents by default. Note that the ‘Spanish Golden Visa’ is the only visa that does not require one to be a tax resident in Spain. In most cases, provided an individual ensures they spend less than 183 days in the Spanish year ending 31 December, and that they demonstrably keep their centre of vital interests and residence in the UK, they won’t become a Spanish tax resident.
In order for someone to meet the criteria to become a Spanish tax resident, one of the following three conditions must be met: that they spend more than 183 consecutive days of the Spanish tax year in Spanish territory; the spouse (not legally separated) or children habitually reside in Spain; or that they have their centre of vital interest in Spain. That which constitutes ‘vital interests’ is somewhat of a legal grey area, however it is usually defined as the place where not only assets but also income and expenditure are located. Note that the Spanish tax office will take the confines imposed due to Covid-19 into account where applicable.
With regards to clients classified as ‘dual residents’ in both the UK and Spain, the applicability of a ‘tie-breaker’ should be assessed, as per Article 4 of the double tax treaty between the UK and Spain, signed on 14 March 2013, which helps establish which country has the right to tax an individual based on establishing their country of residence. While the position of the UK Is relatively straight forward, in Spain, the tax inspector is less likely to accept the non-residency position. It is also worth noting that the Spanish tax residence criteria makes it impossible for a UK citizen to be a nomad in Spain.