One of the key questions individuals moving to Spain ask is: When will I become tax resident in Spain?
It is vital to understand the date from which you will become tax resident in Spain as this will determine your liability to tax in Spain.
Residents of Spain are taxable on their worldwide income and gains (subject to the application of double tax treaties) whereas non-residents of Spain are taxable in Spain only on Spanish source income and gains.
Spain also has a wealth tax which applies to the value of your worldwide assets if you are tax resident in Spain, but only your Spanish assets if you are not tax resident in Spain.
Residence Rules in Spain
The tax year in Spain is the calendar year.
Spanish legislation states that an individual is resident for tax purposes in Spain if their habitual residence is in Spain during the tax year in question. An individual may have their habitual residence in Spain if any of the following tests apply:
- They spend more than 183 days in the calendar year. These days
do not have to be consecutive.
'Temporary absences' from Spain are ignored for the purpose 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.
- Their 'centre of economic interests' is in Spain, i.e. where the majority of their investments are located, business or professional activities are carried out, assets are managed, or where the individual obtains the majority of their income.
- Their 'centre of vital interests' is in Spain. In most cases, this test will be met if the spouse and/or dependent minor children live in Spain. If this test is met, an individual is presumed Spanish resident, unless proven otherwise, even though they may spend less than 183 days per year in Spain. This test generally applies to situations where one spouse remains in the Spanish home, but the other spouse spends a significant amount of time outside Spain, e.g. travelling on business. The travelling spouse will be deemed to be resident in Spain.
The tax year in Spain is the calendar year. Under Spanish law, the tax year cannot be split for residence purposes. You are either resident or not resident for the whole tax year.
Planning for Spanish Tax Residence
Your liability to tax in Spain in your year of arrival will generally depend on when you move to Spain.
If you move to Spain during the first half of the calendar year, you are likely to be regarded as tax resident in Spain from 1st January of that year. All income and gains arising to you from 1st January of that year will be liable to tax in Spain. This could result in a tax liability in Spain on income arising before you physically moved to Spain.
For example, if you move to Spain in May 2023 and you receive a large dividend from a UK company in April 2023, this dividend will be taxable in Spain even though it was received before you moved to Spain. In these circumstances, a tax credit will be available for any UK tax paid on the dividend. However, you may suffer a higher liability if the Spanish tax on the dividend income is higher than the UK tax.
You would also become liable to wealth tax for 2023, which would be based on the value of your worldwide assets at 31st December 2023, subject to the application of a Double Tax Treaty.
If, instead, you delay moving to Spain until August 2023, you may remain non-Spanish resident for the 2023 calendar year, and become resident in Spain from 1st January 2024. In this case, you would not be liable to pay tax in Spain on any (non-Spanish source) income received before you moved to Spain, and you will avoid tax in Spain on (non-Spanish source) income arising from the date you moved to Spain up to 31st December 2023.
For example, in the above scenario, if you receive a UK dividend in October 2023, it would not be liable to tax in Spain as you are non-Spanish resident for the calendar year 2023. The dividend may also escape UK tax, due to the operation of certain tax reliefs in the UK for non-UK residents.
In addition, as a non-Spanish resident, your liability to wealth tax for 2023 would be restricted to Spanish assets held at 31st December 2023.
Therefore, by carefully planning the timing of your move to Spain, it is possible to create a unique opportunity for tax planning.
If you are intending to move to Spain, you should seek professional advice well in advance of your planned move, in order to ensure there is sufficient time to carefully plan the timing of your arrival in Spain, manage the move in a tax efficient manner, and take advantage of any tax planning opportunities that arise.
We specialise in advising on cross-border matters relating to tax, wealth management, financial advice and retirement planning, in Spain and the UK, as well as other countries.
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.