Clients often tell us “I’m not Tax Resident in any country”. It is a serious mistake to think one is not a tax resident, because when you least expect it, the Spanish Tax Agency, or that of any another country can claim taxes from you as a resident, and bearing in mind that there is usually a 4 year expiry period, if you are asked to make tax returns for the last 4 years for your entire worldwide income, it can involve a large sum of money, plus interest and even fines for concealing information.
When does Spain consider an individual to be a Tax Resident in this country? The reply in some cases can be complicated, but we will try to shed some light on this question. There are three basic criteria:
- Continuous stay in the country
- Economic ties
- Personal ties
In the first place, continuous stay for more than 183 days of a calendar year in Spain, taking into account that “occasional absences” (such as holidays) are not counted for calculating this period, unless the taxpayer demonstrates his or her tax residence in another country. Furthermore if someone lives in any country considered by Spain to be a “tax haven”, then the Tax Administration could ask for evidence of living in that country for the same 183 day period in a calendar year.
Secondly, we would mention the economic ties, which Spain takes as being any country where a person has the base or core of his or her economical activities or interest, whether directly or indirectly. This can be a double-edged sword, but it is usually interpreted as the place from where at least 51% of your income is produced, or even the place from where you run your business, even if none of your companies are located in that country. It is even defined as being the place where economic, financial or business decisions are made.
Lastly, there are the personal ties, which mean the following: if your spouse (from whom you are not legally separated) and any children who are minors and are financially dependent on you, have their regular residence in Spain, then you are also considered to be a Tax Resident in Spain, unless there is evidence to the contrary.
All of this means that, in the first two cases there is no evidence to the contrary, i.e. if you are in Spain for more than 183 days or if your business interests are based in Spain, then you are considered a Tax Resident in Spain, unless, of course, you can present a “Tax Residence Certificate” from another country, in which case there is proof that you are not Tax Resident in Spain. You will note that we say “or” and not “and”, that is to say, it is enough to meet any of these requirements, you do not need to meet both at the same time in order for the Inland Revenue to consider you as a tax resident.
As for meeting the third requirement, if your spouse and children live in Spain and, for example, your children go to a school on the Costa del Sol, then the Inland Revenue will consider you to be a Tax Resident; this is an automatic assumption that can be reversed if you demonstrate that, in spite of them living here, you live in another country and travel to see them from time to time.
Once you are Tax Resident in Spain it is important to know that if the taxpayer moves to a tax haven, you may be considered a Tax Resident in Spain during the year when the change took place and the following four financial years, and in this way you would continue to be linked with Spain for tax purposes, with the consequent obligations. This rule can be avoided by going to live for a year in a country with which Spain has signed a double taxation agreement, i.e. by going to live in a country not considered a tax haven by Spain and then moving to the country you wish, because the first year will have served to cut the tax ties with Spain.
How is a solution found for conflicts regarding tax residence? It is sometimes really difficult to demonstrate tax residence in one country or another; in fact, if the pickings are juicy, both countries could consider you a Tax Resident. In these cases, in order to prevent double taxation there are mechanisms for settling disputes, always based on the existence of an agreement between States. The following rules are normally applied between two countries for establishing residency, in the following order:
- An individual shall be deemed to be a resident in the State where he or she has a permanent home available. If there is no permanent home, or in the case of having a home in both countries:
- Where he or she has the closest personal and business ties. For example, the children’s school, the golf club, the gym, or the Church you attend.
- Failing the above, where you have your usual residence, even if this is not for 183 days of the calendar year.
- The fourth criterion for establishing residence is If it cannot be determined by any of the previous points, you will be resident in the country of which you are a citizen. And if you are not a citizen of either of the countries in dispute? We will then go to the fifth point.
- Finally, it will be established by mutual agreement between States.
It is seen that on occasions, determining tax residence can reach unimagined extremes, this is why it is important to have good tax planning, because the obligations arising from being a Tax Resident in a country are usually numerous, and most require you to pay tax on your worldwide income. We even know of some countries that do not even issue tax residence certificates that the Spanish Tax Agency could accept as being valid.
What to do when a country does not issue a Tax Residence Certificate? In these cases a solution has already been given by the General Directorate of Taxes in its reply to the consultation number 0665-13, stating that the Inland Revenue could then accept any evidence demonstrating tax residence in another country, even if without a certificate. However, it should be said that in practice, the Inland Revenue takes the stance that most interests it, denying the validity of evidence or simply not accepting it as valid.
The type of proof that does not usually fail is to register with the corresponding embassy and show a passport demonstrating entry and exit from the country, but each case is individual, and should be considered as unique.
Finally, we would stress that a residence permit is not the same as tax residence.
It is clear that all this legislation can be interpreted differently and especially be given different applications. What is essential is to plan your movements from a tax point of view when paying taxes in one country or another, and for this, always contact a professional.
Note:  The Spanish Tax Authorities consider a permanent home in practice to be one where you might live at any time, i.e. one that you have ready for occupation without prior preparation. You have sheets, towels, kitchen utensils, domestic appliances, etc.