On 9 February 2021, the Spanish General Directorate of Taxes (DGT) set out its official response to an enquiry about the tax residency of a teleworker from the UK who was living and working in Spain. This is a binding decision that establishes the residency status, for tax purposes, of a foreign worker carrying out remote working in Spain.
Case V0194/2021 found that a foreign worker who works remotely from Spain, for a company that is not located in Spain, can be considered a tax resident in Spain, and as such is liable to pay Spanish tax on all of their worldwide income.
Details of the case
The DGT was asked to consider the status of an individual who was offered a job by a British company. The worker would be allowed by the company to work remotely in Spain provided that he spent more than 91 days each year in the UK.
The DGT was asked to give its ruling as to where the individual should pay taxes and, if the answer was in Spain, how double taxation could be avoided.
The DGT response
The DGT stated that the following criteria would determine where an employee was resident in Spain for tax purposes, in line with internal legislation:
- Has the individual spent more than 183 days during the calendar year in Spain?
- Is the main centre of income-generating activity or economic interests in Spain, either directly or indirectly?
If the answer to either of the above questions was yes, then an individual working remotely in Spain will be considered to be resident in Spain for tax purposes.
The DGT also looked at the issue of double taxation. The employer was a British company, meaning there was a risk that the employee could be taxed in the UK. The Directorate looked at Article 15 of the Model Agreement to Avoid Double Taxation, finding that the income earned by the teleworker could only be taxed in Spain, even if it was for work done for a British company.
The situation if the worker is not resident in Spain for tax purposes
If the teleworker had not met either of the two criteria for tax residency, then Spain would only be able to tax income earned when the individual was working from Spain and not their worldwide income. Taxation in this situation would be Non-Resident Income Tax.
If the UK also sought to tax the income as the worker’s country of residence, the worker would need to establish the right to avoid double taxation in the UK.
Telecommuting and taxation in Spain
With teleworking on the increase, both employees and businesses need to be wary of the Spanish tax authorities.
If a business has a permanent establishment in Spain, then it is required to register for local tax on economic activity (IAE) in the municipality where the premises are located.
However, the DGT has confirmed that companies do not have to register for IAE in the places where it only has teleworkers, but no other premises. This is on the basis that the company does not have a right of disposal over or access to the teleworker’s domicile.
In respect of other premises, it is not always straightforward to determine whether or not a business has a permanent establishment. If premises in Spain are available for it to use, even if a business does not have legal title to them, it could be classed as a permanent establishment requiring the business to register for tax.
Similarly, if an employee regularly exercises powers to contract in the name of the non-resident company, this could be enough to show a permanent establishment. While businesses may be keen to save the costs of setting up office space for employees, they need to be aware that there could still be substantial tax implications.
While the case referred to a UK worker for a British company, the precedent will also apply to any overseas worker who works remotely in Spain for an overseas company if the individual spends in excess of 183 days in Spain.
Where an overseas worker is classed as a tax resident in Spain, they will be liable not just for Spanish income tax, but also for Spanish taxation on all of their worldwide income. They may also have to submit the modelo 720 worldwide declaration of assets, which has to be taken very seriously considering the severity of fines involved for failing to declare this form, or for making any mistakes.
The Spanish tax system is complicated, and the authorities are motivated to reduce underpayment or avoidance of tax, so it is advisable to seek expert tax advice when working in Spain for a substantial period of time.
Penalties can be severe, even if non-payment is a genuine mistake.
Del Canto Chambers is the only London-based set of chambers specialising in Spanish tax and legal residence. We have an in-depth understanding of international tax, legal affairs, property law and residence issues.
We can advise you on your tax status and ensure that you do not fall foul of the Spanish tax authorities.
We offer a Tax and Legal Residence Opinion service that will clearly set out your options with regard to living and paying tax overseas. This will enable you to make an informed decision as to how to structure your affairs and which country of residence will be most advantageous for you.