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Tax residence; Tax issues and consequences

Topics about non-resident income and its obligation to report have already been disclosed with our previous posts. The key issue here is to determine the tax residence, in which territory the taxpayer (individual or company) is considered to be a tax resident. Doubts may arise when economic interests are performed in more than one country and income is obtained or assets are held.

Tax residence criteria

Although article 9 of Personal Income Tax Law 35/2006 defines the criteria for being considered a tax resident in Spain, it may happen that the other state, where the taxpayer has earned income or has assets, also considers the taxpayer to be a tax resident.

In fact, this circumstance quite common. Although it is true that spending more than half of the year in a country is usually a residence criteria, in Spain there is another treatment, which states that the taxpayer for whom the main core or base of his activities or economic interests, either directly or indirectly, is located in Spain, will be a tax resident. Certainly, the domestic legislation of other countries also do apply criteria that may, at some point, mirror to a paradox statement declaring that a taxpayer may be considered tax resident in both territories. Now, if this is the case, how to proceed?

Double taxation agreement

In this case, it will be necessary to refer to the double taxation agreement between Spain and the corresponding state. Review of the residence criteria is compulsory. Normally the treaty offers different "tie-breaking criteria", in order of preference. At least, it is normally indicated that the authorities of both states will decide by mutual agreement, but fixing an agreement before it comes to this point uses to be the most common method. It is important to remark that being a non-resident, but choosing to be taxed as a resident in one country, if applicable, for some income in another, may imply that the taxpayer will be considered a resident by both countries' tax authorities.

Evidencing that he/she is a resident in the other country will be compulsory

Each individual case may be completely different from the other: different countries, different income, different personal circumstances... Tax queries due to residency issues need to have a clear, solid and documentary proved method applicable to the country, in which the taxpayer will be tax resident.

Reversals of being considered a tax resident in one territory rather than another and the relative withdrawals can have serious consequences in quantitative terms.

For example, in Spain the general non-resident rate is currently 19% for taxpayers from other EU countries. If later controls performed by the tax office determine the taxpayer to be a resident, the maximum marginal rate depends on the autonomous regions, but percentage applicable can be around 50% and therefore, parallel liquidations of a significant amount (plus interest and taxes) can be levied.

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