Spanish tax system is based on the world income, meaning that tax residents in Spain are taxed on their worldwide income and, depending on where they reside, also on their worldwide wealth. On the other hand, non-residents in Spain are only taxed on their Spanish income (and assets) sources. It is, therefore, crucial to understand the Spanish tax residency rules to determine the associated tax burden and avoid surprises deriving from a tax residency by accident.
Tax residency is always a domestic issue, the laws of each country unilaterally establish the rules for considering a person tax resident of their country. The Tax Treaties to avoid double taxation only contain clauses to avoid double tax residency of a person by establishing tie-breaking rules to be applied by the tax authorities in the event two countries consider the same person as tax resident of their respective states in accordance with their respective laws.
Personal Income Tax Law establishes two circumstances
In Spain, Personal Income Tax Law establishes two circumstances (in addition to a third one defined as a presumption of residency) that can trigger the tax residency in Spain of a person, and both must be proven by the Tax Administration:
- The stay in the Spanish territory -for a period over 183 days within the calendar year- for which the so-called “sporadic absences” will be counted, unless a tax residency in another country is proven. In the case of tax havens, the Tax Administration may require proof of permanence in such territory for 183 days within the calendar year.
- That Spain is the country where the main nucleus of economic interests resides, directly or indirectly.
There are many occasions in which the Tax Authorities, during tax inspections procedures, try to reverse the burden of proof by requiring the taxpayer to prove their tax residency in another country. It is not, in our opinion, the taxpayer who has to prove his/her residency in another country, but the Tax Administration who should demonstrate that a certain person meets any of the circumstances mentioned to be deemed resident of Spain for tax purposes.
The issues that are usually faced during a tax inspection on tax residency of individuals are many and of different nature. On many occasions, we find cases in which the proof of residency in another country (with Tax Treaty or not) provided by the individual does not satisfy the Spanish Tax Administration. It is precisely when the rule of 183 days of permanence and its computation acquires greater relevance.
The computation criterion is usually a matter of many discussions during tax audit procedures given the lack of a regulated computation procedure. In this sense, the law does not say much about how the days spent in Spain are to be counted for the purpose of the tax residency; it is not clear if a few hours count as a day, or if the person must stay overnight. Nor does the law clarify the meaning of “sporadic absences”, of at most importance, in many occasions, to complete the 183 days of permanence that leads to the Spanish tax residency.
It should be noted that the concept of “sporadic absence” was introduced in our legislation to facilitate the work of the Spanish Tax Administration as a consequence of globalization, the elimination of borders and the greater geographical mobility of people.
However, we have been observing that this concept is being used by the Tax Authorities to systematically, and sometimes abusively, attract the tax residency of an individual to Spain in people who travel very frequently through different countries and spend some days off in Spain.
The Supreme Court has put some common sense in the matter by adopting various judgments, issued in November 2018, where the concept of “sporadic absence” is somehow clear out. In this sense, the sporadic absence should be interpreted to avoid undesirable situations or limit, in a certain way, the indiscriminate use that the Tax Administration has been making of the concept.
The Supreme Court says that:
- A sporadic absence cannot include periods of time extended in time and, in fact, greater than the one foreseen in the precept as of legal permanence (more than 183 days), nor could it absorb, for example, the entire tax period, because in such a case the occasional or sporadic would cease to be so and would prevail over the permanent, instead of complementing it.
- It cannot be considered occasional or sporadic a prolonged, long-lasting absence for a period exceeding 183 days, since if this was the case, the concept of habitual residence, supported by the one of permanence in Spain, would be completely deprived of meaning and reason.
- Without physical presence, even reasonably corrected with the factor of sporadic absences, there is no permanence in the sense of article 9.1.a) of Law of Personal Income Tax and, therefore, there is not habitual residence.
Therefore, in our opinion, regardless of where the taxpayer resides, what the Supreme Court comes to say is that sporadic absences cannot be counted as days of stay in Spain if all of them, as a whole, exceed 183 days, as in that case, they stop being sporadic to become permanent.
Tax residency is always a controversial issue in which all the factual circumstances related to the case must be carefully analyzed. It is necessary to provide our tax system with legal certainty to prevent non-residents, who spend periods in our country but in no way reside permanently, from ending up involved in lengthy procedures before the Tax Administration and even before our Courts of Justice.
The Tax Agency must use the rule to fight against fraud and tax evasion, pursue the tax nomad and avoid abusive des-imposition situations, but it must also consider the idiosyncrasy of our territory (bordering Gibraltar or Andorra) and prosecute each case from an objective and neutral point of view in order to avoid unnecessary conflicts.
Many times, we come across verifications in which taxpayers are forced to prove their “non-permanence” in Spain because ab initio they are presumed to be residents in Spain and guilty of not having declared as a Spanish taxpayer.