An International Tax Agreement between the UK and Spain in respect of Gibraltar entered into force on 4 March 2021.

Whilst the Agreement is now in force, various provisions (e.g.the residency provisions) will not take effect until 1 July 2021 in Gibraltar and 1 January 2022 in Spain, those dates being the respective start dates of their next tax years.

The Agreement is designed to improve tax co-operation between the tax authorities of Spain and Gibraltar. It provides rules for resolving conflicts over tax residency and enables administrative co-operation, through sharing of information and addressing disputes by means of a Joint Committee.

There are a number of measures requiring special mention, including those covering individual tax residency, corporate tax residency and tax information exchange.

Individual Tax Residency

Principally, individuals will be considered tax resident in Gibraltar or Spain according to their respective domestic laws.

For Gibraltar this means that individuals are considered to be ordinarily resident in Gibraltar if they are present in Gibraltar for either 183 days or more in a tax year, or more than 300 days in total in three consecutive tax years. The Gibraltar tax year runs from 1 July to 30 June.

For Spain this means that individuals are tax resident in Spain if they are present in Spain for more than 183 days in any calendar year or their centre of vital interests – economic, business or professional activities – is in Spain. In the absence of proof to the contrary, a married individual is deemed to be a resident of Spain if the permanent home of his/her spouse and dependent minor children is in Spain. The Spanish tax year runs from 1 January to 31 December.

For both domestic laws, a 'day' is defined as any presence in a 24-hour period.

If an Individual satisfies both of these tests, the Agreement provides a tie-breaker rule for individual tax residency. It is important to note that this tie-breaker rule will only be relevant in cases where, according to the tax laws of each jurisdiction, the individual is considered tax resident in both jurisdictions and therefore a tax residency conflict arises.

The tie-breaker rule will treat an individual as only resident in Spain if:

  • The individual spends more than 183 overnight stays in Spain in a calendar year. In determining the overnight stay count, sporadic absences outside Gibraltar and Spain will be added to the overnight stay count of the country (either Gibraltar or Spain) where they have the most overnight stays. e.g. if an individual spends 120 nights in Spain and 100 nights in Gibraltar, their remaining time (i.e. 145 nights) will be added to the Spanish count, taking the Spanish count over the 183 overnight test
  • Their spouse / partner, and / or any dependent ascendants / descendants, reside habitually in Spain
  • Their only permanent home at their disposal is in Spain
  • Two-thirds of their net assets, determined by Spanish Tax legislation, whether held directly or indirectly, are located in Spain

If the above is not conclusive, individuals will be considered tax residents only in Spain, unless they are able to provide reliable evidence that they have a permanent home for their exclusive use in Gibraltar and have remained in Gibraltar for over 183 days.

If, under the tie-breaker rule, an individual is considered to be exclusively tax resident in Spain, he/she will then cease to be considered as tax resident in Gibraltar under Gibraltarian domestic tax laws, and vice versa.

Gibraltar special tax residency regimes

Gibraltar's special tax residency regimes for High-Net-Worth Individuals (HNWIs), Category 2 Individuals (Cat 2), High Executive Possessing Specialist Skills (HEPSS) or any other equivalent regime that may be created in the future, will not of itself, constitute proof of tax residency in Gibraltar under the Agreement.

Such residents will therefore need to satisfy the domestic Gibraltar tax residency rules – be present in Gibraltar for 183 days or more in a Gibraltar tax year, or more than 300 days in total in three consecutive years. However, the latter test may not be sufficient in some cases, where 183 days and permanent home available for exclusive use will be required in a calendar year.

Change of Residency Rules

Spanish nationals who move their residency to Gibraltar after 4 March 2019 (i.e. the date the Agreement was signed) will in all cases only be considered tax residents of Spain. Non-Spanish nationals who provide proof of their new residency in Gibraltar will not lose tax residency in Spain in the tax period in which the change of residency is made or during the four subsequent tax years.

This will not apply to non-Spanish nationals who spend less than one complete tax year in Spain or 'registered Gibraltarians' who spend less than four years in Spain. 'Registered Gibraltarians' are any natural person defined as such by the Gibraltarian Status Act, which includes British citizens who have resided in Gibraltar for over ten years.

Tax Residency of Companies, Partnerships, Trusts and Foundations

Under the Agreement, companies, partnerships, trusts and foundations will be considered to have residency only in Spain when any of the following circumstances exist:

  • The majority of the assets, whether directly or indirectly owned, are located in Spain or consist of rights that may or must be exercised in Spain
  • The majority of the income accrued in a calendar year derives from sources in Spain under to Spain's Non-resident Income Tax Act
  • The majority of the natural persons in charge of effective management are tax resident in Spain
  • The majority of the interests in the capital or equity, voting or profit-sharing rights are under the control of either natural persons who are tax residents in Spain or legal persons, entities and other legal structures or arrangements linked to tax residents in Spain

The final two bullet points will not apply if the entity was incorporated in Gibraltar before 16 November 2018 and it satisfies further conditions, but the deadline to apply for this exclusion has now passed

Spanish legal persons, entities, other legal structures or arrangements whose residency is moved to Gibraltar after 4 March 2021 will in all cases maintain tax residency only in Spain.

Tax Information Exchange

The Gibraltar Tax Office will continue to provide information to the Spanish tax authorities, which will include:

  • Annual information on workers registered in Gibraltar as residents in Spain, fully identifying every aspect of the underlying employment relationship or any trade, business, profession or vocation carried on or exercised by these workers, including details of duration, economic terms and employer
  • Direct and free access to the records of the Registrar of Companies in Gibraltar, as well as to the Gibraltar Land Registry.
  • Direct access to beneficial ownership information as is public or, on request to the Commissioner of Income Tax in Gibraltar, on companies, corporate bodies, partnerships and foundations
  • Direct access to information as is public or otherwise available to the Commissioner of Income Tax in Gibraltar on the settlors, trustees, beneficiaries and assets of all types of trusts, as well as to other legal structures or arrangements established or managed in Gibraltar, or governed by its legislation, when the settlors, trustees, protectors or beneficiaries are tax resident in Spain or the assets held by all types of trusts are located in Spain.

'Fiscal Paradise' De-Listing

It is anticipated that, as a result of this Agreement, Spain will (in time) remove Gibraltar from its 'black list of countries definedas afiscal paradise. One positive effect of this may be that Spanish residents working in Gibraltar will then be able to benefit from the Spanish foreign earnings tax exemption, which allows up €60,100 (current rates) per year to be exempted from Spanish tax.

Certain conditions have to be met. For example, the work has to be carried out outside Spain and the earnings have to be taxed in that country. This is a provision that already exists in Spanish domestic legislation but which is not applied to 'black list countries.

If this happens, it will mean that employees who are resident in Spain but work in Gibraltar and earn less than €60,100 per year should only pay Gibraltar tax. Those earning more than €60,100 per year would be liable to Spanish taxation on the balance above this exemption.

Furthermore, if Gibraltar is de-listed, the burden of proof under the 183-day rule for determining residence under Spanish domestic law could be shifted from the taxpayer to the Spanish tax authorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.