Exemption from income obtained from work abroad, art. 7.p) of the Personal Income Tax

Personal income tax is a direct, personal tax levied on the income of individuals, based on their personal and family circumstances.

There are several exempt incomes, detailed primarily in Article 7 of Law 35/2006, of November 28, on Personal Income Tax (hereinafter, IRPF). We will specifically refer to those included in section “p” of the aforementioned article: “Income obtained from work abroad.”

The law establishes that all remuneration received by taxpayers who are tax residents in Spain for work performed outside of Spain will be exempt from taxation, provided that certain requirements are met, and up to a limit.

This is a way to promote the competitiveness of Spanish companies and their internationalization by offering tax incentives to workers who travel outside of Spain to perform certain jobs, usually temporary.

In this type of remuneration, in order to assess whether or not the exemption is applicable, it is necessary to analyze each specific case, as it has been the subject of controversy due to the diversity of possibilities, employment relationships, and conditions.

Let us then analyze these mandatory requirements:

1. Income from work received for work actually performed abroad

First, the nature of the employment income eligible for this exemption must be analyzed. The worker must be physically located outside of Spain and the work must actually be performed abroad. For this purpose, the workplace must be established, even temporarily, outside of Spain. This may be a worker assigned abroad or a temporary transfer of the worker.

This exemption applies to both an employee who is part of the workforce and someone specifically hired for that job. It is irrelevant whether the employer who hires them is a private entity or a public administration, nor is it relevant whether the entity is a resident or not.

2. That said work is carried out for a company or entity not resident in Spain, or for a permanent establishment located abroad

The exemption will apply provided the beneficial owner is a non-resident entity or a permanent establishment abroad. It does not apply if the beneficiary of the work performed abroad is a company resident in Spain (for the purpose of seeking commercial agreements with third parties, market research, and project acquisition for the entity, etc.).

If the employment relationship is with an entity resident in Spain: the employee travels abroad, on behalf of and under the direction of their company, to perform the work for which their company has been contracted: “services between independent companies.”

In the provision of transnational services: travel to a company’s work center abroad, or to a group company. In this case, the key is being able to answer the question: would an independent company have been willing to pay another independent company to perform that activity? What matters is the final recipient.

If the employment relationship is with a non-resident entity:It can be done without a change of residence (cross-border worker), or with an effective change of residence: in this case, the year of entry and exit is important.

In principle, this refers to employment relationships with the worker, in terms of their employment income. Therefore, a priori, it would not apply to self-employed workers who provide their services outside the country, since their services are declared as income from economic activities. However, there are cases in which the contracts are actually employment contracts. If it can be proven that the worker is the person most commonly referred to as a “false self-employment,” they could qualify for this exemption.

3. That in the territory where the works are carried out a tax of identical or analogous nature to that of Personal Income Tax is applied, and that it is not a country or territory that is legally classified as a tax haven.

When the work is performed in a country with a Double Taxation Agreement with an information exchange clause, this requirement will be deemed to have been met. If there is no agreement, proof of such is required. This requirement cannot be applied if the country or territory in which the work is performed is considered a tax haven for Spain. The country in which the services are actually provided must be analyzed. If there are several countries, each one must be analyzed.

4. Maximum limit of 60,100 euros per year

One-time and annual. Non-prorated.The exemption will apply to wages earned while abroad and will have an annual limit of 60,100 euros, which must be prorated by the length of stay in the country where the work is performed, calculated over 365 days a year.

Except for specific remuneration, the total number of calendar days of the posting, including non-working days (not including those spent for personal reasons before or after completing the work), will be divided among the total number of days in the year. If all the earnings are earned during the posting abroad, no proportional distribution will be made.

5. In the case of taxpayers based abroad, the exemption is incompatible with the regime of excesses excluded from taxation (art. 9.A.3.b 4 of the RIRPF)

The taxpayer may choose to apply one regime or another.

It is compatible with the per diem regime, but not with the regime of excesses excluded from taxation, as allowances for living or subsistence expenses.

The excess allowance regime, set out in Article 9.A.3.b 4 of the Personal Income Tax Regulations, may be applied whenever the transfer involves a change of workplace for more than 9 months, without losing tax residency in Spain. It also allows the supplements received by the transferred worker for said transfer to be considered as non-taxable allowances, in addition to their usual salary, without any quantitative limitations and without the need for a similar tax to exist in the destination country.

It will therefore be necessary to analyse whether it is appropriate to apply this regime or to avail oneself of the exemption included in article 7.p) of the Personal Income Tax Law, depending on the specific conditions applicable.