Tax Residence in Spain: A Guide for Individuals

1.1 Introduction to Spanish Tax Residence

To be considered a Spanish resident for tax purposes, any one of the following criteria must be met:

The individual resides in Spain for at least 183 days over the calendar year; or
The individual has their main base or centre of their business, professional activities or economic interests, directly or indirectly, in Spain.

Any individuals who do not meet any of the above criteria are not resident in Spain for tax purposes.

Under Spanish domestic law, the concept of a part year for residence purposes does not exist. An individual is either resident or non-resident for the full year.

In certain circumstances, an individual could be considered tax resident under domestic law in two countries. In such situations, the Double Tax Treaty (“DTT”) between Spain and the relevant territory should be reviewed in order to determine where the individual is considered primarily resident.

The Spanish tax system is complex, especially for non-native speakers. It is advisable to consult a qualified tax adviser with expertise in the Spanish tax system to ensure compliance and avoid penalties.

Each of the above tests are considered further below.

1.1.1 The ‘183 days’ test

The ‘183 days’ test, as described above, allows for some temporary absences from Spain. To conclude that the individual is a Spanish tax resident, they must have been physically in the country for 183 days or more in the calendar year. Any absence for a period of 183 days or more in any other country may mean that the absence was not temporary, and the test will not have been met.

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1.1.2 Centre of activities or economic interests

For the purpose of establishing whether an individual has their main base or centre of their business, professional activities or economic interests, directly or indirectly, in Spain, a detailed review of their personal facts and circumstances and should be undertaken.

It is important to note that an individual is generally considered to be habitually resident in Spain, regardless of whether the 183 days test is met, when the individual’s spouse or dependent children reside in Spain.

However, if the individual has a certificate of tax residency in another jurisdiction, it is possible that they will be able to rebut the implied Spanish tax residency under this test.

Where the majority of an individual’s assets and interests are based in Spain, they may also trigger tax residence status in Spain. In the same manner as above, if they hold a certificate of tax residency in another jurisdiction, they may be able to rebut the implied Spanish tax residency under this test.

1.2 Liabilities for tax residents in Spain

Once an individual is considered a tax resident in Spain, they will become liable to pay income tax, including for self-employed individuals and non-residents, as well as Income Tax (including Capital Gains Tax) and Wealth Tax, in the appropriate autonomous regions, where applicable. Liabilities will arise on all income or funds received and caught by these regimes, regardless of the jurisdiction of the source of funds.

An individual will also become liable for succession tax and gift tax on an event that would incur such liabilities, which has been discussed in more detail later in this document.

Local taxes will be applicable which are dependent on the individuals’ locality, as will lVA (which is the equivalent to VAT in the UK).

1.3 Autonomous regions

Spanish tax legislation can be set at regional and local level, with each region being called an ‘autonomous region’ (comunidad aut6noma). Usually, it is clear which autonomous region an individual will fall under for tax purposes however, it can sometimes be more convoluted where an individual holds many assets in Spain and it likely to be a consideration when applying the Economic Interest test.

When deciding which autonomous region an individual will fall under for tax purposes, this is dependent on the type of tax in question. The considerations for each are set out as follows:

(a) When considering Income Tax, this is dependent on where the individual has spent the most days in that financial year;

(b) When considering Wealth Tax, this is dependent on where the individual has spent the most days in that financial year, or if this cannot be identified, this will be the region where the individual receives the most income; and

(c) When considering Succession or Gift Tax, this is dependent on where the individual spent the most time in the 5 years preceding their death.

1.4 Arriving and departing Spain part way through the year

As set out above, the Spanish tax year mirrors the calendar year, and there is no concept of split year residence. This means that an individual will be a resident or non-resident for the entire tax year unless a period of residency in another country can be evidenced either before or after the period of Spanish residence commences.

For example, if an individual arrives in Spain during the first six months of the year, and has the intention of staying in Spain for the rest of the year, the individual will likely be regarded as a Spanish tax resident, on the basis that they will meet the 183 days test.

If an individual arrives in Spain from July to December (i.e., the last six months of the year), unless the 183 days test requirements have been fulfilled, it is unlikely that the individual will be considered as a Spanish tax resident. However, it should be noted that this may depend on whether there have been any frequent or long visits to Spain in that same year, as this may suggest an earlier date of Spanish residency. Furthermore, consideration will still need to be given to the other two residence tests.

When leaving Spain within the tax year, the above conditions apply with the reversed effect (i.e. with a move in the first six months, the individual may not be regarded as resident in

Spain and vice versa). Any absence could be assumed as temporary unless proof is provided that the individual has commenced residence in another country.

1.5 Spanish Tax Year and Filing Requirements

The Spanish tax year aligns with the calendar year, running from January 1st to December 31st. Individuals who are considered tax residents in Spain must file their income tax returns annually. The deadline for submitting the income tax return, known as the “Declaración de la Renta,” typically falls between April and June of the following year.

Filing an income tax return in Spain involves reporting all worldwide income, including employment income, savings income, and capital gains. The process can be completed online through the Spanish Tax Agency’s website or by visiting a local tax office. It is crucial to file the return on time to avoid penalties and interest charges on any tax payable.

Tax residents should also be aware of the Modelo 720 form, which requires the declaration of assets held abroad if their value exceeds certain thresholds. Failure to submit this form can result in significant fines.

1.6 Personal Income Tax in Spain

Personal income tax in Spain is progressive, meaning that the tax rate increases as the taxable income rises. The tax brackets and rates are set by both the central government and the autonomous regions, leading to variations across different regions.

Employment income, savings income, and capital gains are all subject to Spanish income tax. Employment income is taxed at progressive rates, with deductions available for social security contributions, personal allowances, and family circumstances. Savings income, including interest and dividends, is taxed at lower rates, while capital gains are taxed based on the holding period of the asset.

Tax residents can benefit from various deductions and allowances, such as those for mortgage interest, charitable donations, and contributions to pension plans. These deductions can significantly reduce the overall tax liability.

1.7 Wealth Tax and Other Taxes

In addition to income tax, Spanish tax residents may be liable for wealth tax, which is levied on the net value of their worldwide assets. The wealth tax rates and thresholds vary by autonomous region, but generally, individuals with assets exceeding €700,000 are subject to this tax. Primary residences are usually exempt up to a certain value.

Other taxes that may apply include local taxes, such as property tax (IBI) and vehicle tax, as well as succession tax and gift tax. Succession tax is imposed on inheritances, while gift tax applies to gifts received. The rates and exemptions for these taxes also vary by region.

It is essential for tax residents to understand their obligations and seek professional advice to ensure compliance with all applicable taxes in Spain.

1.8 Double taxation and dual residence

Double taxation occurs when an individual is taxed on the same income in two different jurisdictions. To mitigate this, Spain has entered into Double Tax Treaties (DTT) with many countries. These treaties provide mechanisms to determine the primary tax residence and allocate taxing rights between the countries involved.

When an individual is considered a tax resident in both Spain and another jurisdiction, the DTT will outline tie-breaker rules to establish the primary residence. These rules consider factors such as the location of the permanent home, personal and economic relations, habitual abode, and nationality.

1.8.1 Where a DTT exists between Spain and another jurisdiction

When a DTT is in place, the following criteria are used to determine the primary tax residence:

(a) The location of the individual’s permanent home. If they have a permanent home in both jurisdictions, the focus shifts to where their personal and economic relations are closer.

(b) If personal and economic relations cannot be determined, the habitual abode is considered, which is where the individual stays more frequently.

(d) In cases where nationality does not resolve the issue, the tax authorities of both jurisdictions must reach a mutual agreement.

These criteria help ensure that the individual is not subject to double taxation and that their tax liability is fairly allocated.

1.8.2 Absence of OTT between Spain and another jurisdiction

1.5 Double taxation and dual residence

Many countries hold a Double Tax Treaty (DTT) with Spain and they are utilised to support with the identification of the primary residence state of an individual where they are considered tax resident under domestic law in both jurisdictions.

1.5.1 Where a DTT exists between Spain and another jurisdiction

Where an individual has been considered as a tax resident in two jurisdictions, then the following deciding factors will generally need to be assessed in order to determine which jurisdiction has primary taxing rights:

(a) The location of the individual’s permanent home;

(b) If they have a permanent home in both locations, then where their personal and economic relations are closer. This generally includes family ties and where their economic, political, domestic, and cultural ties are more closely aligned;

(c) If the above cannot be determined, then where they have a habitual abode (i.e., where the individual is deemed to stay more frequently over the relevant period);

(d) If this cannot be determined, then the nationality of the individual will take precedent;

(e) If this does not apply, i.e., there is dual nationality or neither nationality is applicable to the jurisdiction that is considering tax residency, the tax authorities must make a mutual agreement as to where the individual will be considered a tax resident. This process can be complex.

1.5.2 Absence of OTT between Spain and another jurisdiction

Where an individual has been considered as a tax resident in two jurisdictions, but there is no DTT agreed between the jurisdictions, the Spanish domestic legalities apply, and the individual will be considered as a Spanish tax resident.

1.6 Double Tax Treaty between Spain and the UK

For the purpose of assessing an individual’s residence status who is both a resident in Spain and the UK under domestic rules, the tie breaker tests as outlined in 1.5 above should be considered.

In addition, the Spain/UK DTT contains the following provisions, which should be noted:

1.6.1 Treatment of Capital Gains Tax on sale of company shares

The DTT allows for Spanish tax liabilities to become payable on any share sale of a company that has an asset portfolio made up of 50% or more of Spanish real estate, regardless of whether the company is UK registered or if the selling shareholders are UK residents.

1.6.2 Treatment of withholding tax

The DTT allows for dividends paid from a company resident in the other jurisdiction to be taxed in both states. However, the withholding rate payable in the country where the company paying the dividend is resident must not exceed:

• 10% of the gross amount of the dividends; or

• 15% where dividends have arisen from direct or indirect profits from real estate.

There is no withholding tax for royalties and interest income. Furthermore, where a company receives dividends from a company which is resident in the other state and which it owns at least 10% of the share capital, the withholding rate is nil.

1.6.3 Treatment of exemption with progression

The Exemption with progression provision within the DTT works by enforcing that all income or capital exempt from Spanish tax liabilities is to be included in the final calculation that is utilised to calculate the tax rate of an individual.

This means that although a certain amount of capital may be directly exempt from tax, it will still work to increase the tax rate for a Spanish tax resident, amounting to an increased tax liability.

1.7 Individuals with no tax residence

Where an individual is not a tax resident in any country, due to nomadic lifestyle choices such as travelling the world and moving countries often, they may attempt to avoid tax liabilities on any income and gains they receive.

However, if an individual owns property in Spain and otherwise would be considered to have no tax residency, they may become a Spanish tax resident unless proof of tax status could be provided by another jurisdiction.

Where information being exchanged between authorities is common practice, it has become harder for individuals to avoid tax in this fashion. If time is spent in Spain or if an individual has Spanish assets, this may be enough to deem them as Spanish tax resident.

1.8 Tax residence status of individuals in Gibraltar

Where an individual resides in Spain, but works or claims residence in Gibraltar, the status of residence is now determined by the International Agreement on Taxation and Protections of Financial Interests (‘International Agreement’) which came into effect from 1 January 2022. The International Agreement applies to both individuals and companies, affecting income and corporation tax and is applicable to individuals in the following way:

• If there is a conflict arising out of any of the above residency criteria tests due to an individual qualifying as a tax resident in both countries, the individual will automatically become a Spanish tax resident, rather than a tax resident of Gibraltar.

Any Spanish nationals that decide to reside in Gibraltar after March 4 2019, will remain a tax resident of Spain.

Any non-Spanish nationals that are resident in Spain, that then decide to move residency to Gibraltar, will remain as tax residents of Spain for the year of the move/transfer and the four years following this. There are exceptions to this rule, being as follows:

(a) any individuals who have spent less than one full tax year in Spain; and

(b) any registered Gibraltar residents, that have spent less than four years in Spain.

1.9 Moving to a ‘tax haven’ country

If a Spanish national moves to a tax haven, the person will be treated as a Spanish tax resident for income tax (including capital gains tax) liabilities for the year of that move and for the following four years.

This guide is only part of guidance associated with individuals, it does not construe to be a guide or advice specifically for individuals – you should seek personalise professional advice.