Determine Treaty Residence
Where both countries regard the same individual as resident, treaty rules may determine residence for treaty purposes.
International Tax & Relocation
International Tax When Moving to Spain
Understand how tax residence, double tax treaties and cross-border income can affect you before relocating to Spain.
International Tax
Two countries. One tax position.
Double tax treaties are a fundamental part of international tax planning for individuals and companies whose income, assets or business activities extend across more than one country.
For clients with connections to Spain, a treaty can help determine tax residence, allocate taxing rights between countries and establish the mechanism used to relieve double taxation.
The result depends not only on Spanish law, but also on the wording of the specific treaty and the domestic rules of the other country.
The Framework
What Is a Double Tax Treaty?
A double taxation agreement is an international agreement between two countries governing how specified taxes apply where both jurisdictions have a connection with the same taxpayer, income or asset.
A treaty does not normally replace domestic tax law. Instead, domestic law establishes the initial tax position and the treaty may then restrict or allocate the taxing rights of each country.
Allocate Taxing Rights
Different treaty articles govern categories such as property income, pensions, dividends, interest and business profits.
Provide Relief
Depending on the treaty, double taxation may be relieved through exemption, foreign-tax credits or another agreed mechanism.
Cross-Border Situations
When Does a Treaty Become Important?
Treaty analysis becomes particularly relevant when a person or business retains meaningful connections with Spain and another jurisdiction at the same time.
Living Partly in Spain
Spending substantial periods in Spain while maintaining a home, family or economic interests elsewhere.
Spanish Property
Owning, renting or selling Spanish real estate while remaining tax resident in another country.
Foreign Income
Receiving pensions, dividends, interest, rental income or other income from outside Spain after relocating.
International Business
Operating a company across borders or carrying out activities in Spain through a foreign business structure.
Residence comes before the treaty.
The first analysis is generally whether Spain considers the individual resident under Spanish domestic tax law.
A treaty becomes particularly important where the other country also treats that individual as resident under its own legislation.
In that situation, the treaty may contain specific tie-breaker rules to determine residence for treaty purposes.
Spanish Domestic Law
Spanish Tax Residence Tests
Residence may arise where an individual remains in Spanish territory for more than 183 days during the calendar year, subject to the statutory rules governing the calculation.
Spanish residence may also arise where the principal centre or base of the individual’s activities or economic interests is located in Spain, directly or indirectly.
Spanish law contains a rebuttable presumption where the non-legally separated spouse and dependent minor children habitually reside in Spain.
Important distinction:
the residence of the spouse and dependent minor children is a
statutory presumption, not an independent third residence test.
Dual Residence
What If Both Countries Claim Residence?
It is possible for two countries to regard the same individual as resident under their respective domestic laws.
Where an applicable treaty contains residence tie-breaker rules, those rules must then be applied according to the wording of that particular treaty.
Permanent Home
The analysis commonly starts by determining where a permanent home is available.
Centre of Vital Interests
Personal and economic relationships may then determine with which country the individual has closer connections.
Habitual Abode
If the previous tests do not resolve residence, habitual living patterns may become relevant.
Further Treaty Tests
Nationality and ultimately agreement between the competent authorities may apply depending on the treaty.
A foreign tax residence certificate is important evidence,
but it is not automatically decisive in every case.
Domestic residence rules and, where applicable, the relevant treaty
must be analysed together.
Spanish Property and Cross-Border Tax
Real estate is one of the clearest examples of why international clients must distinguish tax residence from the location of an asset.
Under many double tax treaties, income from Spanish real estate may be taxed in Spain because the property itself is situated here, even where the owner remains resident in another treaty country.
This includes income arising from the rental or other use of the Spanish property, subject to the relevant domestic law and treaty provisions.
The owner’s country of residence may then also need to consider that income and apply the appropriate treaty relief mechanism.
Property Structures
Holding Spanish Property Through a Company
Using a company to own Spanish real estate does not necessarily remove Spanish taxing rights when that company or its shares are later sold.
A number of modern tax treaties contain provisions dealing with so-called real-estate-rich companies. Depending on the treaty, Spain may retain the right to tax gains from shares whose value derives principally from Spanish real estate.
The exact percentage, calculation method, exceptions and other conditions must always be checked in the relevant treaty.
Example:
under the Spain–Germany double tax treaty, gains from shares or
similar interests whose assets consist at least 50% directly or
indirectly of Spanish real estate may be taxable in Spain.
Different Income · Different Rules
International Income Is Not All Treated the Same
Private & Public Pensions
Pension treatment depends on the wording of the relevant treaty. Private and public-sector pensions may be subject to different allocation rules.
The country paying the pension is therefore not necessarily the only factor determining where tax is due.
Dividends & Interest
Treaties commonly regulate whether the source country may impose withholding tax on dividends and interest and, if so, the maximum rate that may apply.
The residence country may then provide relief from double taxation according to the treaty and its domestic legislation.
Sale of Assets
Capital gains require identification of the asset being sold. Real estate, company shares and other assets may follow different treaty rules.
Particular attention is required where the value of shares derives substantially from property located in Spain.
Relocating to Spain
A person becoming Spanish tax resident may continue to receive income from their previous country of residence.
Spanish domestic law, the source-country legislation and the applicable treaty must then be considered together.
Companies
International Business Structures
Double tax treaties are equally important for companies carrying out business across borders.
The legal and tax result can differ substantially depending on whether activity in Spain is carried out through a Spanish company, a permanent establishment or another cross-border structure.
Permanent Establishment
A foreign company carrying out sufficient activity in Spain may create a permanent establishment under domestic law and the applicable treaty.
The treaty can then determine what profits Spain is entitled to tax in connection with that establishment.
Parent–Subsidiary Structures
Qualifying EU corporate groups may also benefit from the Parent–Subsidiary Directive and the corresponding national implementing rules.
Where all requirements are satisfied, qualifying profit distributions can benefit from relief from withholding tax. The conditions and anti-abuse rules must be checked before relying on the exemption.
Conclusion
International taxation requires the right treaty analysis.
Double tax treaties can determine residence for treaty purposes, allocate taxing rights and provide mechanisms to prevent or relieve double taxation.
But no treaty should be applied in isolation. Spanish domestic law, the other country’s legislation, the nature of the income and the exact wording of the applicable agreement all matter.
Property owners, retirees, investors and international companies should therefore analyse their cross-border position before relocating, investing, selling assets or implementing a business structure.
Good international tax planning begins before the transaction or move takes place, not after conflicting tax obligations have already arisen.
Contact Us
-
Marbella 952 901 622
-
Sotogrande 956 790 013
-
Palma de Mallorca 971 626 860