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Tax implications of the posting of workers to Spain

Tax advice in English and German

A European group intends to send workers (expatriates) from across Europe to its factories in Spain, either directly or through employment agencies based abroad.

It should be first examined whether the foreign company is required to withhold income tax from the salaries of these employees (expatriates). The answer to this question is not easy. Depending on each case, these companies do not directly carry out a business activity in Spain. However, the tax authorities will always prefer that tax is withheld in Spain, as to have a better control over these employees’ salaries. Then, it is necessary to determine whether the activity carried out by the foreign company in Spain has a fixed place of business, which would be deemed as a permanent establishment from a Corporate Tax point of view.

Also to be considered is the possibility of transferring the employee’s tax residency to Spain, and the potential application of the special tax regime for inpatriates. This regime allows them to pay taxes in Spain as non-residents for a number of years, exclusively on the income raised in Spain, at a very beneficial rate for salaries. In any case, this regime is very conflictive when taken from the perspective of the posted worker’s home country. As an example, the recent double taxation agreement signed between Spain and Germany clearly states that Germany will not accept the “exit” of those workers who pay tax in Spain under this regime.

It should be noted that income tax withholdings are among the items that the tax authorities examine in detail. Penalties are typically 150% of the amount not withheld as well as late-payment interests. Besides, the country where the employee’s social security contributions are to be paid also needs to be determined, which is sometimes difficult.

For this reason, it is advisable for the company posting workers to create a posting strategy (e.g. contracts, salaries, paying company, entry and leaving dates from Spain, etc.), as well as a clear remuneration system (if tax equalisation is applied). The preparation of the annual Personal Income Tax and Wealth Tax returns of the employees (as well as Form 720, where applicable) is a time-consuming task, due to the complexity of each case.

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