Tax residence: dual residence conflicts
Spain is an increasingly attractive country, whether for strategic or commercial considerations or, directly, for the quality of life it offers, which in turn attracts the establishment and location of foreign individuals with large estates, both within and outside our territory.
However, often, due to a lack of knowledge of the applicable regulations, significant risks can be incurred in relation to the consideration of tax residence in Spain.
Under what circumstances can a foreign person be considered a tax resident in Spain?
Any foreigner spending time in Spain, whether for leisure, health, relaxation or business reasons, may not realise that their stay may have significant tax consequences.
Indeed, according to Spanish domestic legislation, a person will generally be considered to have his or her habitual residence in Spanish territory when any of the following conditions are met:
a) Stays more than 183 days during the calendar year in Spanish territory.
b) That the main core or base of its activities or economic interests is located in Spain, either directly or indirectly.
The taxpayer shall be presumed, in the absence of proof to the contrary, to be habitually resident in Spanish territory when, in accordance with the above criteria, the non-legally separated spouse and dependent minor children are habitually resident in Spain.
Can a person be considered tax resident in more than one country?
It is possible that the person has been considered a tax resident in his home country, despite the occurrence of one of the circumstances mentioned above. As a result, a dual residence conflict may arise, since both states may consider the person to be a tax resident and claim taxation accordingly.
In these cases, it is essential to have recourse to international regulations, specifically to the provisions of the double taxation treaties signed between the countries of origin and destination.
Although each treaty may have its particularities and it is necessary to consult the specific treaty applicable in each situation, in accordance with the OECD Model Agreement, if a tax residence dispute arises, it will be resolved according to the following criteria, in this order and in a subsidiary manner:
- A person shall be deemed to be a tax resident where he has a permanent dwelling at his disposal.
- If this happens in both States, he will be considered a resident of the State with which he has closer personal and economic relations (centre of vital interests).
- If the person can be considered as habitually resident in both States, or is not known to be habitually resident in either State, he shall be deemed to be a resident of the State of which he is a national.
- If he is a national of both States or is a national of neither of them, the competent authorities of the two Contracting States shall settle the case by mutual agreement.
What is meant by ‘centre of vital interests’?
The concept of centre of life interests is particularly contentious, for example, in the case where the person has permanent dwellings in different states.
This is where the greatest confusion often arises, because often, although the taxpayer is taxed in his country of origin, and even has a tax residence certificate issued by the tax authorities of that country, de facto, the centre of his vital interests is in Spain.
This can lead to a conflict of residence, whereby the person would, in a first scenario, be obliged to pay tax twice on all income earned.
The ‘centre of vital interests’ test is primarily factual in nature and depends on the particular circumstances of each case. Each situation must be assessed individually, considering all relevant circumstances as a whole, to avoid reaching an incorrect conclusion.
OECD Model Agreement to avoid double taxation
In this respect, the Commentary to the OECD Model Agreement on the Avoidance of Double Taxation states the following:
‘If the natural person has a permanent residence in both Contracting States, it will be necessary to consider the facts in order to determine with which of the two States he has closer personal and economic relations.
For this purpose, their family and social relations, their occupations, their political, cultural or other activities, the location of their business or professional activities, the place of administration of their assets, etc., shall be taken into consideration.
The circumstances must be considered as a whole, but in any case it is clear that considerations based on the personal behaviour of natural persons should be given special attention.
If a person who has a dwelling in one State establishes a second dwelling in another State while maintaining the first, the fact that the first dwelling is kept in the environment where he has always lived, where he has worked and where his family and property are located may, together with other elements, contribute to showing that he has retained the centre of his vital interests in the first State’.
The definition of ‘centre of vital interests’ is therefore not clear, and has been configured through case law and doctrine established by the Tax Administration and judicial bodies, which distinguish, mainly, two possible links: family and economic, giving prevalence to the former over the latter.
How is a residence dispute resolved?
In the event that the Spanish tax administration imputes the status of tax resident to a person it considers not to be a tax resident, the Supreme Court has established that, in order to prove residence in a State other than Spain, a certificate issued by the tax authorities of the country of residence must be provided.
However, this certification alone may not be sufficient proof for the Tax Administration that the taxpayer is not a tax resident in Spain, and it is necessary to prove conclusively that the requirements that de facto determine non-residence have been met.
In the Double Taxation Agreements, as well as in the Council Directive (EU) 2017/1852 for disputes between EU Member States, the possibility of using an amicable procedure between States to reach a common agreement and thus avoid the negative effect of double taxation is envisaged.
However, let us not deceive ourselves, these procedures are long and the outcome is uncertain. Therefore, if a claim has been initiated by the tax administration, it will follow its course and in this case it will be necessary to use all the tools available to the taxpayer to challenge the claim, in order to prove effective residence and avoid unwanted tax assessments, regardless of whether or not it is advisable to initiate the amicable procedure.
Tax implications of being a tax resident in Spain
The main tax implications of being considered a tax resident in Spain as an individual are as follows:
- Obligation to file and pay the Personal Income Tax Return (obligation to declare worldwide income).
- Obligation to file and pay (in the event of exceeding the exempt minimum) the Wealth Tax Return (obligation to declare world wealth).
- If obliged to do so, filing of the Information Declaration on Assets and Rights Abroad (Form 720).
- In certain cases, it may influence the taxation of inheritance and gift tax.
It is therefore necessary to look at each situation in particular to determine the tax implications related to the place of residence and, of course, to keep a good record that properly accredits its correct allocation. It is highly advisable to take all of the above into account and to act in advance to avoid possible unexpected and undesired consequences.
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