On 4 March 2019, the United Kingdom and Spain signed the International Agreement on Taxation and the Protection of Financial Interests between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland Regarding Gibraltar (commonly referred to as the "Gibraltar/Spain Tax Agreement").
On 13 March 2021, the Governments and Parliaments of the Kingdom of Spain and the United Kingdom took all necessary steps to ratify the entry into force of the Gibraltar/Spain Tax Agreement. The Gibraltar/Spain Tax Agreement entered into force on 4 March 2021.
Although the Gibraltar/Spain Tax Agreement came into force on 4 March 2021, as per the text of the Gibraltar/Spain Tax Agreement, Article 2 (tax residency rules for individuals and legal persons) shall take effect for taxable periods commencing on or after the date of entry into force of the Gibraltar/Spain Tax Agreement. The Spanish tax year runs from 1 January to 31 December, meaning that the next taxable period in Spain commencing on or after the 4 March 2021 is 1 January 2022 to 31 December 2022.
What does this mean?
The provisions set out in Article 2, which we set out below, shall therefore take effect as from 1 January 2022:
Tax residency for individuals
Under the Gibraltar/Spain Tax Agreement individuals will continue to be tax resident in Spain or Gibraltar in accordance with their domestic law. However, the Gibraltar/Spain Tax Agreement contains certain provisions that apply when determining tax residency in the event of a tax residency conflict – that is, when an individual is deemed resident in both Gibraltar and Spain under domestic laws and cannot clearly be categorised as a tax resident of either one. These rules will therefore not apply to individuals who are not considered Spanish tax resident under domestic law. However, in the event of a tax residency conflict, an individual will be considered to only be a tax resident in Spain if any of the following conditions are satisfied:
- the individual spends over 183 overnight stays of the calendar year in Spain (where sporadic absences from Gibraltar or Spain are attributed to where the individual spends the majority of their overnight stay); or
- the individual's spouse (or equivalent) or dependants reside or habitually reside in Spain; or
- the individual's only permanent home at their disposal is in Spain; or
- two-thirds of the individual's net assets are located in Spain.
If the application of the above conditions proves inconclusive, the individual "shall be considered tax resident only in Spain unless they provide reliable evidence that they have a permanent home for their exclusive use in Gibraltar and remain in Gibraltar over 183 days" (Art 2(1)(b)(ii)).
If there is still difficulty or doubt in resolving the tax residency conflict, the case would be referred to the Joint Coordination Committee.
Accordingly, the residency tests and rules under the Gibraltar/Spain Tax Agreement would apply in the following manner.
- In the first instance, individuals are classified as tax resident in Gibraltar or Spain according to the applicable domestic legislation.
- Identification of residency conflict (individual is deemed tax resident in both Gibraltar and Spain and not categorised clearly as resident of either one). The use of 4 tests to establish if individual is only resident in Spain.
- If none of the tests are conclusively met, presumption that individual is tax resident in Spain unless they spend over 183 days in Gibraltar and have a permanent home in Gibraltar. If these latter conditions are met, the individual is tax resident in Gibraltar.
- If there is still a difficulty or doubt in resolving the tax residency conflict, the case is referred to the Joint Coordination Committee.
Tax residency for legal persons, entities and other legal structures or arrangements ("Legal Persons")
Under the Gibraltar/Spain Tax Agreement Legal Persons could include companies, trusts, foundations and similar entities. Legal Persons registered and managed in Gibraltar shall be considered to be tax resident only in Spain, if any of the following four conditions are satisfied:
- the majority of assets are located in Spain; or
- the majority of income accrued in a calendar year derives from sources in Spain; or
- the majority of natural persons in charge of effective management are tax resident in Spain; or
- the majority of capital/equity, voting or profit-sharing rights are under the control of individuals who are tax resident in Spain or Legal Persons linked to tax residents in Spain.
Special rules for determining residency
The following special rules for determining residency shall override domestic law of both Gibraltar and Spain, as well as the above provisions, and will apply to certain classes of individuals upon moving their tax residence from Spain to Gibraltar, as follows:
- Spanish nationals retain their tax residence only in Spain;
- Non-Spanish nationals who have spent at least one complete tax year in Spain, retain tax residence in Spain for the year of change in residence and during the four subsequent years.
- Registered Gibraltarians (as per the Gibraltarian Status Act or British citizens residing in Gibraltar for over 10 years) that have spent at least 4 years residing in Spain, retain tax residence in Spain for the year of change in residence and during the four subsequent years.
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.