Written by Adriana Vericat, Tax Services, ilv silver
According to the Spanish Personal Income Tax (“PIT”) Law, a natural person will be considered a tax resident in Spain, in a certain tax period, when either of the following circumstances occur:
- Staying more than 183 days in Spain during the calendar year, with sporadic absences being taken into account for Spanish tax resident purposes.
- The centre of vital interests or the base of economic activities is located, directly or indirectly, in Spain.
Nevertheless, if an individual is considered tax resident in both Spain and China due to the domestic tax laws in each case, the requirements of the Tax Treaty between Spain and China should be further analysed to identify in which country the individual is tax resident. According to article 4 of the Tax Treaty the criteria set to determine the tax residence in case of a conflict of double tax residence would be as follows.
- Permanent housing available
- Centre of vital interests
- Habitual Residence
The requirements set above are listed in order, that is, if the individual does not comply with the first criteria then it should be analysed if the following requirement is met, and so on.
In the event, that it is not possible to determine the tax residence of the individual because all requirements are met in both States, or none of them are met, then the mutual agreement procedure (“MAP”) will be followed. A MAP implies communication between competent authorities from both States to engage in the resolution of international unresolved tax disputes.
If an individual is considered Spanish tax resident in Spain the individual would be tax liable in Spain for their worldwide income at a progressive tax scale (i.e., 19%-48%), which would depend on the Autonomous Region they reside in.
In addition, as a consequence of being a Spanish tax resident, if that person has properties, bank accounts or other assets such as shares, held outside Spain and whose total amount in any category exceeds €50.000 such information would have to be informed using FORM720.
There is Special tax regime for employees who move to the Spanish territory, commonly known as the “Beckham Law”. Individuals who acquire their tax residence in Spain as a consequence of moving to Spain (more than 183 days in a calendar year), can opt to be taxed according to the Non Resident Income Tax, maintaining their condition as Spanish Income Tax payer, for the tax period in which they change their residence and during the 5 following tax periods, provided the individual moving to Spain complies with the following conditions:
- The individual has not been resident in Spain during the ten tax years before the year in which they moved to the Spanish territory.
- The move to the Spanish territory is due to (i) a job contract or (ii) becoming the administrator of a company in which they hold no shares, or if they do, where their holding does not qualify them as a related party.
- The individual does not earn income classified as obtained through a permanent establishment in the Spanish territory. As a general rule, an individual earns income through a permanent establishment when he or she has available in Spain, in any capacity, facilities or places of work of any type in which they usually perform all or some of their business, or when the individual acts in Spain through an agent authorised to contract on behalf of, and for the account of, the non-resident person or organisation. Provided they habitually exercise these powers, they are considered to be non-residents acting through a permanent establishment.
The total amount of employment income obtained by the taxpayer during the application of the Special regime will be understood to be obtained in the Spanish territory. Under the Special tax regime the percentage to be withheld on income derived from work will be a fixed tax rate of 24%. When the payments made by a single payer for income derived from work during the calendar year exceed €600,000, the withholding percentage applicable to the excess will be 45%.
Due to the fact that when an individual is subject to the Special tax regime, as such individuals are only taxed based on the employment income obtained in Spain and not their worldwide income, they would not be obliged to inform on assets held abroad in FORM720.
When applying the Special tax regime, as a general rule, the individual would be considered as a non-Spanish tax resident for tax treaty purposes due to the fact that in most tax treaties the term resident does not include any person who is liable to tax in that State in respect of only income or capital gains from sources in that State or capital situated therein. As a result, the person would not be able to obtain a tax resident certificate according to the tax treaty and could not take advantage of the tax treaty benefits. Nevertheless, the tax treaty within the double taxation agreement between Spain and China does not include this exclusion to the term of resident. Therefore, an individual who applies the Special tax regime could benefit from the dispositions in the tax treaty between Spain and China to avoid double taxation.
If the individual is eligible, the application of the Special tax regime must be requested before the Spanish Tax Administration within 6 months from the initiation of the activity indicated in the Social Security Register in Spain. The annual PIT return must be filed by the end of June of the following year.
NEW TAX TREATY
The information provided here considers the tax treaty between Spain and China which came into force in 1992. However, it should be noted that there is an agreement in progress and the tax implications should be revised once the new tax treaty is in force.
Moreover, during FY2018 more than 84 states signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). The MLI aims to implement a series of tax treaty measures to update international tax rules and prevent the tax avoidance by multinational enterprises. However, the agreement would not be a ‘Covered Tax Agreement’ because Spain has not included it in its notification.
ABOUT ILV SILVER
ILV SILVER is a Barcelona-based professional services firm that provides a wide range of audit, accounting, tax, legal and other professional services for private and corporate clients in Spain. ILV SILVER specialises in providing transaction and due diligence services for business acquisitions, and real estate and other investments in Spain. Our clients include venture capital and private equity funds, and both private and corporate investors.
If you wish to know more about Spanish tax residency rules, please contact Ms. Adriana Vericat (firstname.lastname@example.org).