It can be surprisingly difficult to establish one’s tax residence in certain circumstances. The onus is on the taxpayer to get it right in order to avoid the charge of tax evasion, which can lead to financial penalties and/or criminal charges.
Mrs Smith is a divorcee living nine months of the year in Spain.
Her neighbour, Mr Davis, works in the oil industry travelling throughout the world. He spends only two months in Spain per calendar year.
Now you might think that Mrs Smith, spending nine months in Spain is tax resident in Spain, whereas her neighbour Mr Davis, spending only two months there, is not Spanish resident.
In fact, it is quite possible for Mrs Smith not to be Spanish resident, whilst Mr Davis is.
How can this be?
Well Mrs Smith owns a business based in Manchester, and her two children go to boarding school in the UK, where she has another home. She has decided to live in Spain for nine months to write a book, returning to the UK during her children’s holidays and to attend Board meetings.
As she remains UK resident under UK tax rules (because she spends more than 3 months in the UK per UK tax year), whilst she is also a Spanish tax resident under the 183 day rule in Spain, the UK/Spain Double Tax Treaty (“DTT”) overrules the Spanish residence determination. She cannot be tax resident in both countries under the DTT, and the DTT tie breaker rules will probably find her to be UK resident despite her spending nine months in Spain.
Mr Davis, on the other hand, is not tax resident anywhere else. His wife and children live in Spain, and he returns to be with them on all the major holidays, birthdays etc. Even through he only spends a mere sixty days or so a year in Spain, it is his centre of interests and the Spanish rules make him Spanish tax resident.
If you are tax resident in Spain, you are liable to pay tax on your worldwide income, worldwide gains, and worldwide assets (wealth tax).
Not Resident Anywhere?
There is no law which states you must be resident somewhere, but if you wish to fit into this category (called “permanent traveller” or “fiscal nomad”) you need to ensure you do not fulfil of any one country’s tax rules. There are many people who legally are not resident in any single country. There are even those people who claim not to be tax resident anywhere, but in fact they are an undisclosed resident of a country either through ignorance or by simply pretending that they are “non resident”. You need not only to understand very carefully the rules, but also to ensure you live by them.
An English national BA pilot thought he understood the UK tax rules well, as he had read the UK Inland Revenue’s book on residence, IR20, and was very careful to lead his life whereby he stayed less than ninety days a year in the UK.
Unfortunately, he didn’t pay too much attention to the inside cover of IR25 which states that the book is a guide and not the law. He was found to be a UK tax resident, despite his protestations to the contrary. Do It Yourself tax planning can be very expensive if you get it wrong. Experienced professional advice in this tricky area is worth every penny.
Residency criteria in Spain
You will become resident for tax purposes in Spain if:
- You spend more than 183 days in Spain in one calendar year. You become liable whether or not you take out a formal residency permit. These days do not have to be consecutive. (Temporary absences from Spain are ignored for the purposes of the 183-day rule unless it can be proved that the individual is habitually resident in another country for more than 183 days in a calendar year.)
- Or, your “centre of vital interests” is in Spain, e.g., the base for your economic or professional activities is in Spain.
- Or, your spouse lives in Spain and you are not legally separated even though you may spend less than 183 days per year in Spain
Note that the Spanish tax years is the same as the calendar year (1 January – 31 December), unlike the UK, which is from 6 April to following 5 April.
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