People who move to Spain from abroad, usually maintain certain links with their country of origin and obtain income from rentals of their properties abroad or from pensions deriving from their previous jobs.
The Spanish Supreme Court will state a binding criterion on the taxation of certain income obtained abroad. The decision finally taken by the Supreme Court could lead to significant tax savings for these taxpayers.
Taxation of Spanish tax residents with foreign income
In general terms, a person who is considered a tax resident in Spain must be taxed on his or her worldwide income, regardless of the income source. The same would apply to Wealth Tax or the new Large Fortunes Tax applicable for the years 2022 and 2023.
However, in order to avoid double taxation on foreign income, some treaties signed by Spain establish an exemption so that such income is only taxed in the country where is originated.
Some common examples of these exemptions are:
- Pensions classified as public pensions: pensions originating from work provided to the government (public services, military, health, etc.) will be taxed exclusively in the country of origin and not in Spain. This exemption is included in many of the agreements signed by Spain, including the agreement with the Netherlands and the United Kingdom.
- Income from rentals of real estate located abroad: As with pensions, there are certain agreements, such as the one with the Netherlands, which establishes that such income is only taxed in the country where the property is located, making it clear that Spain is not entitled to tax such income.
- The same applies to Wealth Tax or Tax on Large Fortunes where, thanks to the Double Tax Treaty, real estate is only taxed in the country where it is located without Spain being able to tax it, regardless of how it is taxed in the country of origin (i.e. Double Tax Treaty with the Netherlands).
There are Double Tax Treaties that clearly establish that Spain does not have the right to tax foreign income or assets, but nevertheless, based on the Double Tax Treaty, the Spanish Tax Office would be entitle to consider such income or assets when determining the tax rate applicable to the rest of the taxable income (commonly referred to as “exempt income with progressivity”).
In Spain, the tax rate is progressive, so that the higher the level of income or wealth, the higher the applicable tax rate. Therefore, including this type of exempt income in determining the rate means a very significant increase in the tax payable.
Among the Double Tax treaties that contain this exemption with progressivity for income from work, pensions, rentals or wealth are the Netherlands, the United Kingdom, Portugal and Japan, among others.
Order of the Supreme Court
The High Court of Justice of Valencia (Spain) has published a ruling in which it recognises that the fact that a given Double Tax Treaty declares an income as “exempt income with progressivity” does not mean that the Spanish Tax Authorities can automatically compute it in order to determine the tax rate applicable to the rest of the income subject to tax in Spain.
The Court considers that it is essential that, in addition to the Double Tax Treaty, Spanish local law should expressly reflect this.
In the absence of an express statement in the current Personal Income Tax Law, the Valencian Court considered that the public pension received from the Netherlands by a tax resident in Spain should be exempt without affecting the tax rate applicable to the rest of his income in Spain.
The Tax Administration has expressed its opposition to that criterion and now the Supreme Court must decide on the issue.
If the Supreme Court confirms the thesis of the Valencian court, this could mean, in practice, a significant reduction in the tax payable by this type of taxpayer and would open up the possibility of reclaiming taxes paid in excess in the last 4 years.
Within the upcoming months, we expect that the final decision will be published by the Supreme Court and taxpayers will be able to obtain certainty on how to declare such income in their tax returns and make decisions on how to regularise previous years.
If you are resident in Spain and receive income from the UK, Portugal or the Netherlands, you may benefit from the criteria that the Supreme Court will finally set once it issues its ruling.
At UHY Fay & Co we have a team of professionals specialised in international taxation and tax procedure who will be able to advise you taking into account your particular situation.
