Situation 1. I am not sure whether I am resident or not
The vast majority of people know whether they are resident or non-resident just from common sense. We divide into those people that live here year round and those who have a holiday home in Spain that they visit from time to time. The former are tax resident in Spain and the latter non-resident, though owners of Spanish property still have to file a tax return (Form 210 – click for details).
For a small number of people however there is room for debate. For example they split their time between two countries or work abroad a lot. The basic rule applied to determine residency is the 183 days rule: if an individual spends this amount of time or more in Spain during a calendar year then he or she is tax resident.
If you split your time fairly evenly between two countries, the authorities in both countries could potentially examine your affairs to make an assessment of residency. They will look at such things as where your property, investments, business and employment are located. You will certainly need to be tax resident in one of the countries.
You may also be considered resident in Spain if you stay within the 183 day limit but other factors indicate it is your main base. For example if your spouse and family live in Spain then the onus will be on you to prove residency elsewhere, however short a time you spend in Spain.
Situation 2: I became resident part way through the year
For those moving to Spain from another country, the year of transition can throw up some questions about residency status. For example, say you gave up a job working in London on 10 th March 2012, spent a couple of months in Spain lining up a job for the Autumn, then went travelling round Africa between June and August before returning to Spain to rent a flat and start your job on 1 st September. You submit a UK tax return for the year to 5 th April 2012 then inform HMRC that you are no longer resident in the UK. Do you have to do a Spanish tax return for 2012?
On the face of it you could be liable to submit a return because you spent the last 4 months of the year as well as part of March and all of April and May in Spain – more than 183 days. However the days you spent in Spain while you were still UK tax resident (i.e. up to 5 April) are not counted for the purposes of Spanish residency determination even though you were physically in Spain from 10 th March. Totting up the days on this basis makes you resident in Spain for the last 4 months of the year, 25 days in April and all of May i.e. not quite 183 days. In a further twist you could choose to submit a return on the basis that you intend to stay in Spain longer than 6 months. This would make sense if you are due a refund of tax deducted from your pay.
If you rent out a property in the UK but are now resident in Spain, the rental income is actually still declarable in the UK and you will have to carry on completing UK tax returns. You do get a UK tax allowance to use against your rental income there (although there is talk of this being withdrawn). As a resident you should include UK rental income again on your Spanish tax return and claim credit for any tax actually paid to HMRC. The 50% deduction from rental income in Spain applies equally to overseas properties including those in the UK.
Situation 3: I still submit a UK (or other country) tax return
Just because you have left the country does not mean that the UK’s HMRC will not keep on sending you tax returns and considering you tax resident, even if you send them back with a Spanish address. For one thing the onus is on you to apply to be treated as tax resident elsewhere by submitting a P85 form giving details of your move (see the HMRC website). Secondly the UK authorities have to be sure that you are no longer UK tax resident before they stop sending you tax forms; leaving the country by itself is not enough. Maybe you still have extensive interests in the UK. How long are you going to be absent from the UK? Are you declaring yourself tax resident in another country? If you really are emigrating you will be able to demonstrate this, but it will certainly require some action on your part.
In the meantime the Spanish tax authorities will not allow your submission of a UK return to excuse completing a Spanish one. They will apply the rules discussed in the first two sections above and expect to see a return if you are Spanish tax resident based on them. It may well mean that you have periods during which you are filing tax returns in both jurisdictions but the tax treaty between Spain and the UK should at least mean you avoid being taxed twice on the same income.
Situation 4: I earn less than €22,000 a year
Just as in the UK, Spain has a system of taxation at source which means that a lot of people never fill in a tax return. If you have a salary and some bank interest which have both been taxed at source by your employer and bank respectively, you will already have paid your tax and will usually not have to do a return, provided the combined income does not take you into higher tax rates.
The cut-off point is €22,000 income in the year from employment and pensions, including those from overseas. This limit falls to €11,200 (€12,000 from 2015) under the following circumstances:
- the income has not been taxed at source
- the income comes from more than one source (e.g. two jobs or two pensions, or one of each). If the other sources add up to €1,500 or less you can still use the €22,000 exemption
But a return becomes obligatory in certain circumstances however low your earnings:
- if you have a claim for double taxation
- if you are due a refund
- if you have made pension contributions
- if you are claiming deductions for cost of buying your main residence
- if you have capital gains or income above certain limits (see below)
Remember that it may be in your interest to make a tax return when your earnings are low, for example if you have worked for only part of the year and may
therefore be due a rebate because your personal allowances exceed your income from the months you worked.
Note that you will always be required to submit a tax return in your first year of tax residency, however low your income.
Situation 5: I live in Spain but earn my living abroad
If you are Spanish tax resident you are obliged to declare your worldwide earnings for tax. So even if you generate no income in Spain you will normally still have to submit a Spanish tax return to declare your foreign income. There is a €60,100 tax exemption on foreign employment earnings which you may be able to use but only if you have paid tax on these earnings already. (This exemption applies to income earned for work carried out physically in the other country.) Adopting the “out of sight, out of mind” approach on the basis that the Spanish tax office will not learn of your overseas earnings is risky. If you are regularly bringing the earnings into Spain to spend then this may trigger an investigation, or if you accumulate cash abroad this may be picked up by the increasingly sophisticated information sharing arrangements between tax authorities.
Anyone operating an internet business physically located in Spain but with overseas sales and customers would be expected to submit a tax return and declare the proceeds. Additionally, they should register the business activity as as autonomo or company and should account for IVA (VAT).
Situation 6: I live in Spain but work in Gibraltar
A lot of Gibraltar workers live in Spain. They should complete a Spanish tax declaration just like any other Spanish residents who work abroad. They will be able to deduct from their Spanish tax liability any tax paid in Gibraltar.
Situation 7: My only income is some interest on a bank account
If you are living off savings prior to your retirement and have no other source of income, then the interest on the savings is taxable and thus you might have to do a tax return. If the interest amounts to less than €1,600 then you do not have to declare it, if it is your only income. If you have two or more sources of income you have to do a Spanish tax return whatever the amounts involved. If you have earned interest on a Spanish bank deposit this will have been subject to tax at source (retencion ) so you will get credit for this and may be able to claim some of it back. Note that you will always be required to submit a tax return in your first year of tax residency, however low your income.
If your savings are abroad, perhaps in an offshore account, and you fail to declare the interest you may be exposed to fines and penalties at a later date. The Spanish authorities are quite sensitive about “Paraisos Fiscales ” (tax havens) and will presumably be taking advantage of the various information sharing agreements that have come in place recently between tax authorities. That said, you may legitimately be able to avoid paying tax on some of the income on some savings products which are structured to legally minimise tax; check with the investment provider.
Situation 8: I want to take advantage of Beckham’s Law
Beckham’s Law, the nickname given to a Spanish tax exemption that allows newly resident workers in Spain to be taxed as non-resident for up to 6 years, is a well known way for high earners to pay tax at a flat rate (currently 24.75%) if they fulfil all the conditions. See details here. This exemption was widely regarded as a loophole to allow rich footballer players to pay half the tax of ordinary Spaniards, so the government modified the regime with effect from January 2010 to only apply to those with earnings up to €600,000. It should be noted that obtaining the exemption does not mean that a tax return is not required. A specific tax return exists for filing under this tax exemption.
A new variation of the expat Beckham scheme has been introduced from 1 January 2015. The rules are similar and those on the old scheme can transfer to the new for the remainder of their original term. The tax rate on this is 24% up to €600,000 then rising to 45%.
Situation 9: My only income is a pension
Usually being in receipt of a pension from your former country of residence will require you to make a Spanish declaration, even if tax has been deducted at source before you received it. However the €22,000 limit discussed in 4. above applies to pensions as well as earned salary so you may get an exemption on these grounds. Note that the limit falls to €11,200 (€12,000 from 2015) if the income has not been taxed at source (like a UK state pension) or if you have more than one income source.
There are also pensions that, under various tax treaties between Spain and other countries, are taxed in the home country and are exempt for Spanish tax purposes. Under the UK-Spain tax treaty, government pensions paid to retired UK civil servants, police or armed forces personnel are treated in this way. If you have a pension in this category it will be taxed in the UK and not in Spain. It used to be the case that this allowed some people to take advantage of personal allowances in both countries. However, as from 2014 it is necessary to declare these exempt pensions in your Spanish tax return. The pension itself will not be taxed in Spain but it will be taken into account in calculating the rate of tax that will be applied to other income, thereby removing the inequality.
Note that you will always be required to submit a tax return in your first year of tax residency, however low your income.
Situation 10: I rent out a property
A lot of foreigners moving to Spain make ends meet by renting out all or part of a Spanish property. Unless the rent is your only source of income and is less than €1,000 for the whole year, it is declarable and you should complete a tax return. Various deductions for items such as rates (IBI), depreciation and maintenance are allowed, and for residents only 40% of long term (i.e. not holiday or seasonal) letting income is taxed. Some landlords fail to declare their rent but they risk discovery and investigation by the Tax Office if, for example, they have funds coming into their bank accounts that they cannot explain, or websites and adverts declaring their property for rent.
If you rent out a property in the UK but are now resident in Spain, the rental income is still declarable in the UK and you will have to carry on completing UK tax returns. You are nevertheless also still required to declare the income in Spain, but there are generous tax allowances and tax you have paid in the UK will be taken into account.