TAX RESIDENCE IN SPAIN

Obtaining tax residence in Spain

A natural person must meet one of the following conditions to be considered a tax resident in Spain:

• Stay in Spain for more than 183 days during the calendar year. Occasional absences are counted towards the 183-day period, unless the taxpayer can demonstrate tax residency in another country with a tax residency certificate issued by the authorities of that country. In the case of countries or territories classified as tax havens, the tax administration may require proof of stay in the tax haven for at least 183 days during the calendar year. About the days of stay in Spain, you may find more info here https://www.luxtonlegal.com/practical-tips-for-determining-your-tax-resident-status-in-spain/
• Establish their main base or center of activities or economic interests, directly or indirectly, in Spain.
• Have a spouse and/or underage dependent children who reside habitually in Spain. However, evidence to the contrary can be provided to refute this situation.

If a person is a resident for tax purposes in Spain, they are obligated to pay Personal Income Tax (IRPF) and taxed on their global income. This means they must report and pay tax in Spain on income earned from any source worldwide, while taking into account the applicable provisions of the international double taxation avoidance agreement signed between Spain and the country from where the income originated.

Personal income tax in Spain works by stages and you will pay more or less depending on your income and the region in which you live. Below is an approximate table summarising the average rate of the amount to be taxed:

IRPF segments	State rate	Regional rate	Total
From 0 to 12,450 €	9.5%	9.5%	19%
From 12,450 to 20,200 €	12%	12%	24%
From 20,200 to 35,200 €	15%	15%	30%
From 35,200 to 60,000 €	18.5%	18.5%	37%
From 60,000 to 300,000 €	22,5%	22,5%	45%
More tan 300,000 €	24,5%	22,5%	47%

Tax residency in Spain for UK and US citizens

I am a British Citizen living in Spain. How is my income handled for tax purposes?

The Tax Spanish-UK Agreement of 14 February 2013 is a bilateral treaty aimed at avoiding double taxation and preventing tax evasion. The key points of the agreement include:

• The agreement applies to income and capital gains taxes in Spain and income tax, corporation tax and capital gains tax in the UK.
• It sets out rules for determining residency, which are used to determine which country has the right to tax an individual’s income and gains.
• The agreement provides for a tax credit in the country of residence for taxes paid in the other country.
• It includes provisions for the exchange of information between tax authorities in the two countries to prevent tax evasion and promote compliance with tax laws.
• The agreement applies to individuals, companies and other entities subject to tax in Spain or the UK.
• The treaty also establishes a procedure for resolving disputes between the two countries regarding the interpretation or application of the agreement.

Under the Spanish-UK Taxation Agreement of 14 February 2013, tax residents in Spain are generally subject to Spanish income tax on their worldwide income. However, specific rules apply to income obtained from British sources such as pensions, dividends, and capital gains.

Pensions:  The tax treatment of UK pensions in Spain depends on several factors, including the type of pension and the specific terms of the Spanish-UK tax treaty. 

Here are some general guidelines:

1. State Pensions: The UK State Pension is taxable in Spain. It is treated as income and is subject to Spanish income tax rates. However, under the Spanish-UK tax treaty, the UK State Pension is only taxable in the UK. Therefore, if you are a Spanish resident who receives a UK State Pension, you will not have to pay tax on that income in Spain.
2. Occupational Pensions: If you receive an occupational pension from a UK employer, it is generally taxable in both the UK and Spain. However, the Spanish-UK tax treaty allows for a tax credit in Spain for any tax paid in the UK on this income. This credit helps to prevent double taxation.
3. Personal Pensions: If you receive a personal pension from a UK provider, it is generally taxable in both the UK and Spain. Again, the Spanish-UK tax treaty allows for a tax credit in Spain for any tax paid in the UK on this income.
4. Lump Sum Payments: If you receive a lump sum payment from a UK pension, it may be taxable in Spain. The tax treatment depends on several factors, including the type of pension, the age at which you receive the payment, and the amount of the payment.

It’s important to note that the tax treatment of UK pensions in Spain can be complex and will depend on your individual circumstances. It’s always a good idea to seek the advice of a qualified tax professional to ensure that you are complying with all applicable tax laws and taking advantage of any available tax credits or deductions.

Example: An individual who is a tax resident in Spain and receives a pension from the UK due to previous employment in the private sector will be exclusively taxed in Spain. The obligation to file a tax return for personal income tax for 2023 is triggered if the pension received is over 14,000 euros per year and subject to the limits and conditions of the obligation to declare for the year 2023. This is because the UK pension payer is not obligated to make deductions for Spanish personal income tax. 

Dividends: Article 10 of the Spanish-UK tax treaty deals with the taxation of dividends. 

According to this article, dividends paid by a company that is a tax resident of one of the two countries to a resident of the other country may be taxed in both countries, but the tax withheld in one country can be credited against the tax due in the other country.

The maximum withholding tax rate on dividends is 10% of the gross amount of the dividend. However, this rate may be reduced to 0% in certain cases, such as when the recipient of the dividend is a company that owns at least 10% of the voting power of the company paying the dividend. In this case, the withholding tax may be reduced to 0% if the recipient is the beneficial owner of the dividend and meets certain other conditions.

It’s important to note that the tax treatment of dividends may vary depending on the specific terms of the Spanish-UK tax treaty and the circumstances of the individual taxpayer.

Capital Gains: Capital gains from the sale of UK assets are generally subject to tax in the UK, but Spain may also tax the gain under certain circumstances. 

Article 13 of the Spanish-UK tax treaty deals with the taxation of capital gains. According to this article, gains from the alienation of movable property forming part of the business property of a permanent establishment that an enterprise of one country has in the other country are taxable only in the country where the permanent establishment is located.

For gains from the sale of other assets, such as real estate, the right to tax the gains is given to the country where the property is located. However, there are certain exemptions and conditions that may apply, depending on the specific circumstances of the transaction and the terms of the treaty.

In general, the article aims to prevent double taxation of capital gains by ensuring that they are only taxed once in the country where the economic activity generating the gains takes place.

It is important to note that these rules may be subject to change, and individuals should consult with a tax professional for advice on their specific situation.

You may find more information on this link: https://sede.agenciatributaria.gob.es/Sede/en_gb/ayuda/manuales-videos-folletos/folletos/folletos-residentes-rentas-extranjeras/reino-unido.html

I am a US citizen and would like to relocate to Spain. What would be my tax liabilities?

Rules to be considered tax resident in Spain are defined above. Although the Agreement on Avoidance of Double Taxation (DTA) also establishes criteria for determining tax residency, as well as procedures for dispute resolution and the exchange of information between the two countries’ tax authorities.

The Agreement on Avoidance of Double Taxation (DTA) between Spain and the United States is a treaty designed to prevent individuals and companies from being taxed on the same income by both countries. The agreement aims to promote cross-border trade and investment by providing greater tax certainty and reducing the risk of double taxation.

The agreement covers various types of income, including business profits, dividends, interest, royalties, capital gains, and employment income. It sets out the rules for determining which country has the right to tax each type of income, and also establishes the maximum tax rates that can be applied.

The DTA provides mechanisms for resolving disputes between the two countries, including procedures for mutual agreement, consultation, and arbitration. It also includes provisions for the exchange of information between tax authorities to prevent tax evasion and ensure compliance with the agreement.

Overall, the DTA between Spain and the US serves to provide greater tax certainty and promote cross-border trade and investment by eliminating the risk of double taxation and providing mechanisms for resolving disputes.

Below you will find some bullet points on how your pensions, dividends and capital gains would be treated:

Pensions: how would your pension be treated?

Article 20 of the Spain-US tax treaty deals with the tax treatment of social security payments made by one country to residents of the other. 

In general, such payments are only taxable in the country of residence of the recipient.

Article 21 of the treaty deals with the tax treatment of pensions and other similar retirement benefits. 

The general rule is that pensions paid to residents of one country are taxable only in that country, except in cases where the pension is paid by the government of the other country. In that case, the pension may be taxed in both countries, but the country of residence must provide a credit for any tax paid to the other country. The treaty also provides for certain exemptions and deductions for pension income.

Dividends: How would your dividends be taxed?

Article 10 of the Agreement on Avoidance of Double Taxation between Spain and the US establishes the rules for taxation of dividends.

According to the article, dividends paid by a company that is a resident of one of the countries to a resident of the other country may be taxed in both countries. However, the tax rate in the country where the dividends arise may not exceed 15% of the gross amount of the dividends. This means that if a US company pays dividends to a Spanish resident, Spain may tax the dividends but the tax rate cannot be more than 15% of the gross amount of the dividends.

If the recipient of the dividends is a company that owns at least 10% of the shares of the company paying the dividends, then the tax rate may be limited to 5% of the gross amount of the dividends.

Capital Gains: Article 13 of the Spain-US Double Taxation Treaty deals with the taxation of capital gains.

It states that capital gains from the sale of immovable property, such as real estate, are taxable in the country where the property is located. However, if the property is used for business purposes, the gains may be taxed in the country where the seller is a resident.

For movable property, such as shares in a company, capital gains are generally taxed in the country where the seller is a resident, unless the shares derive the majority of their value from immovable property located in the other country. In such cases, the gains may be taxed in the country where the immovable property is located.

The treaty also provides rules for determining the tax base, the applicable tax rates, and the procedure for eliminating double taxation. Overall, the goal of the treaty is to avoid double taxation and encourage cross-border investment and trade between the two countries. 

 You may find more information here: https://sede.agenciatributaria.gob.es/Sede/en_gb/ayuda/manuales-videos-folletos/folletos/folletos-residentes-rentas-extranjeras/estados-unidos.html

THE “BECKHAM LAW” BENEFIT

Eligible natural persons that acquire their tax residence status in Spain because of territorial displacement to Spain, can opt to being taxed as per the taxation on income of non-residents, while maintaining their status as taxpayers of the IRPF. 

They will then be taxed at a flat rate of personal income tax of 24% (up to 600.000 €), instead of the progressive usual scale for Spanish residents taxed as per IRPF.

Since the tax will be paid under the umbrella of the IRPF, there is an autonomic gross tax charge to the effect of financing the Autonomous Communities under the Common System and Cities with autonomy statutes. Besides this, there is no additional regional income tax.

REQUIREMENTS

Art. 93.1 LIRPF, in accordance with Art. 113 RIRPF, lays down the requirements to be complied with by the taxpayer in order to be able to be taxed as per the special regime.

The requirements are the following:

• To not have been a resident in Spain during the previous 5 years. This indicates that a person with Spanish nationality who has lived abroad could also opt for this law.

That the displacement occurs as a result of one of the following circumstances:

• By an employment contract, with the exception of the special employment relationship of professional athletes.
• For reasons of teleworking carried out from Spain, without the need for it to be ordered by the employer.
• By acquiring the position of administrator of an entity. If it is a patrimonial entity, the administrator cannot have a participation equal to or greater than 25%.
• That they do not obtain income that could be deemed to be satisfied by a permanent establishment located in Spanish territory, unless it is an emerging company.
• That they carry out in Spain an economic activity qualified as entrepreneurial, in accordance with Article 70 of Law 14/2013, of September 27th.

BENEFITS

Exclusive taxation on income in Spanish territory

As long as the taxpayer proves his/her tax residence in Spain, he/she will be taxed in Spain exclusively on income obtained in Spanish territory and not on his/her worldwide income. 

Therefore, income obtained abroad (income obtained in a country other than Spain) will not be taxed in Spanish territory, with the exception of earned income, which must always be taxed in Spanish territory, regardless of the country in which it is generated.

In addition, another major advantage is that no taxation at regional level in Spain would apply to income or assets held outside Spain.

For more information, do not hesitate to contact us! Related post: https://www.luxtonlegal.com/guide-to-non-resident-income-tax-in-spain-2022/