Although the beneficial Spanish tax regime for foreign executives has been in place for a few years, it appears from our client base that not everyone who could benefit from this regime is necessarily taking the full advantage from it. This article summarises the main points on tax residency in Spain and who can benefit from the special regime for foreigners.
Residence for tax purposes in Spain
According to the Spanish Personal Income Tax Act, an individual becomes resident for tax purposes in Spain if any of the following situations takes place:
a. If he stays for over 183 days of the calendar year in Spanish territory. In said computation, sporadic periods abroad are considered days of physical presence in Spain unless evidence of the acquisition of another tax residency is given by way of the corresponding certificate of residence. If the residence abroad is in a country or territory statutorily classified by Spain as a tax haven, the tax administration is entitled to request evidence of presence for over 183 days in the calendar year.
b. To have in Spain the main nucleus or base of activities or economic interests, either directly or indirectly.
c. Finally, it is presumed, and thus the contrary can be demonstrated, that an individual is resident for tax purposes in Spain when the married spouse and dependant children are Spanish residents for tax purposes.
Should an individual be considered resident for tax purposes in Spain and in the US, the tie-breaker rules of the US-Spain income tax treaty would be applied for the sake of attributing only one residency for tax purposes.
Acquisition of residency for tax purposes in Spain means the obligation to pay taxes in Spain on a worldwide income basis. As a general rule, income obtained by Spanish individuals is subject to tax at a progressive tax scale whose current marginal rate is 43%. However, capital gains and savings income are taxed at a flat rate of 18%.
Beneficial hybrid tax regime for foreigners
Notwithstanding the above, the Spanish Personal Income Tax Act allows individuals acquiring the status of tax resident in Spain to be taxed as if they were non residents (this means keeping the marginal rate at 24% vs. the 43% for residents) in the tax period they arrive and in the following five consecutive tax periods. In order to qualify for said regime, the following requirements must be met:
a. Not to have been resident for tax purposes in Spain in the 10 years prior to the move to Spanish territory.
b. The move to Spanish territory must be as a result of a labour agreement. This requirement is met when a regular or special labour relationship starts with an employer in Spain, or when the transfer has been instructed by the employer and an expatriation letter exists, provided that the individual does not obtain income considered through a permanent establishment in Spain.
c. The employment work must be effectively carried out in Spain. This requirement is met even if part of the work is rendered abroad (i.e. out of Spanish territory), provided that the sum of the considerations for such work abroad does not exceed 15% of the overall consideration received in each calendar year. Under certain situations, the referred limit is increased to 30%.
d. The employment work must be carried out for a corporation or entity resident in Spain or for a permanent establishment situated in Spain of a non Spanish resident entity. This requirement is met when the services are rendered to the benefit of a corporation or entity resident in Spain or for a permanent establishment situated in Spain of a non Spanish resident entity. In the event of an intra-group move, it is required that the employee is hired by the company of the group resident in Spain or that a transfer to Spanish territory is instructed by the employer.
e. The employment income derives from a labour relationship and must not be exempt under the Spanish Non Resident Income Tax Act.