The Acquisition and Loss of Tax Residency in Spain

12.2012

Tax residency for individuals is one of the key criteria upon which a state can impose taxes on certain income, and it is the foundation for taxation based on economic capacity. In Germany, there is no equivalent provision to Article 31.1 of the Spanish Constitution; instead, it is developed as a manifestation of the principle of equality under Article 3 of the German Constitution. The application of this principle, throughout the 1960s and beyond, became intertwined with another key principle of great importance: worldwide income taxation. For this reason, a tax resident must pay tax on all income earned throughout the year, regardless of the country of origin, considering their personal circumstances.

These two principles have led to increasingly complex tax laws, a growing tax administration, and a continuous rise in the tax burden. Proportional tax rates were abandoned in favour of progressive rates, and anti-abuse measures began to appear. During these decades, Europe and other countries built the social state that regularly requires vast resources to finance its activities. Consequently, the social state evolved into a fiscal state, and the backbone of this "brave new world" is tax residency.

Thus, the traditional territoriality criterion that prevailed until the 1960s, which required only the taxation of income earned within a specific territory while excluding income from other countries, became less important in the face of the young and demanding new criterion of worldwide income taxation. In the context of the growing internationalisation of the economy during the 1960s and 1970s, nationality became increasingly irrelevant, to the point where today, nationality holds almost no significance in determining tax residency.

The Double Taxation Agreement (DTA) between Spain and Germany, signed in 1966, specifies that the national laws of each country will determine when an individual acquires or loses tax residency in that country. Article 9 of the Spanish Income Tax Law (IRPF) outlines two criteria for acquiring tax residency in Spain: 1) Physical presence in Spain for at least six months per calendar year (the calculation begins on January 1st each year, not when the person enters Spain); and 2) Having the main centre or base of one's economic activities or interests in Spain, directly or indirectly. The first criterion is typically the most applicable, as the second is generally considered an anti-abuse measure.

To understand what constitutes physical presence, several court rulings are noteworthy, such as those from the Spanish Supreme Court (11 November 2009 and 16 June 2011) and the National Court (15 November 2000). These rulings clarify that two elements are required: a subjective element, the intent to reside in a specific location, and an objective element, actual physical presence. Thus, permanence is a defining characteristic of tax residency, which should not be confused with domicile.

Therefore, it is insufficient to merely claim residence in Spain in order to obtain tax residency. Additionally, being registered in Spain does not automatically equate to tax residency, though it can serve as an indication that would compel the taxpayer to justify their non-residency (the so-called reversal of the burden of proof). This presumption and reversal of the burden of proof also applies when a taxpayer's spouse and children reside in Spain. In this case, it is presumed that the taxpayer is also a resident of Spain.

For individuals who regularly visit Spain and wish to avoid acquiring tax residency, it is crucial to ensure that "sporadic absences" are not counted. This refers to days spent outside Spain that, because of frequent visits, could count towards the six-month threshold. In such cases, it is essential to prove tax residency in another country if needed.

In cases of doubt, particularly when the six-month threshold is nearly met, the Spanish tax authorities will not enforce the six-month rule if the person visiting Spain comes from a country considered "friendly" from a tax perspective (such as countries within the EU). However, if the visitor is from jurisdictions like Andorra, Gibraltar, or Monaco, the Spanish authorities will not accept tax residency certificates from these countries (which can be purchased). Instead, they will require proof of actual physical residence and intent to remain in these tax havens.

Students, for instance, do not acquire tax residency merely by staying in Spain for over six months, as they do not intend to generate income and will likely return to their home country after completing their studies.

When a person acquires tax residency in Spain, it should automatically result in the loss of residency in their country of origin. The issue of dual residency must be avoided, as it would require taxation of worldwide income in both countries, leading to double taxation—taxing the same income twice. In practice, conflicts frequently arise in the year of relocation (with two possible residencies or even two non-residencies), as each country may count the six-month period differently. Furthermore, Spain does not allow the splitting of the calendar year, meaning a person can either be a resident in Spain or not for the entire year, but not both.

A recent example from the 2011 IRPF case illustrates this point. A Polish company transferred an engineer to Spain, where she worked from January to August 2011, before relocating to Poland in September. The correct solution would be to consider her a tax resident in Spain for the entire year of 2011, with no tax residency in Poland. However, the Polish authorities insisted she was a tax resident of Poland because she owned property there and her parents lived in the country. The Spanish authorities, naturally, disagreed, asserting she was a resident in Spain as she worked there for more than six months. As a result, the engineer had to file two separate tax returns in both countries due to the misunderstanding of how tax residency is acquired and lost.

According to the Polish tax authorities' approach, it is impossible to lose tax residency in Poland as long as one maintains ties to the country, such as having parents living there or owning property. What no administration will accept, however, is the notion of no tax residency in any country—commonly referred to as "dual non-residency." This situation has led to significant issues in many neighbouring countries.

Article 93 of the Spanish IRPF Law, introduced around ten years ago, includes provisions designed to attract "white-collar" workers who move between companies within the same group. This special regime has been highly successful in preventing the relocation of tax residency to Spain, even when the worker resides in Spain for several years. Under this regime, an employee who lives and works regularly in Spain (for one or more employers) may still avoid being classified as a tax resident for up to five years. This tax fiction allows the worker to be taxed only on income earned in Spain at a lower proportional rate, rather than the progressive rate that would apply to tax residents. Foreign-earned income is exempt, although special, complex rules apply to workers with managerial and directorial responsibilities in multiple countries.

The problem with this regime is that Spain has unilaterally created a hybrid status, which is somewhat arbitrary. Sometimes, the person is considered a non-resident (lower tax rate, no social security contribution deductions), while in other cases, they are treated as a resident (taxing interest income in Spain, which would otherwise be exempt for non-residents, and applying diet exemptions). The most significant issue is that the certificate issued by the Spanish tax authorities stating that a person benefits from this regime does not affect their tax residency status in other countries, as this "pseudo-residency" does not meet the requirements set out in the Double Taxation Agreements.

Germany, after various discussions with the Spanish tax authorities, insisted on including a clause in the 2011 Double Taxation Agreement between Spain and Germany, which could lead to the non-recognition of this special regime. The non-recognition of this Spanish regime for expatriates in many countries (where there had been no transfer of tax residency to Spain according to the prevailing Double Taxation Agreement criteria) meant that the worker could continue being considered a resident in their home country and thus be required to pay taxes there.

++ Article originally published in German in the magazine “Economía” in 2012, issued by the German Chamber of Commerce in Spain ++