It’s February and I’m only getting around to uploading my first post of the year. January just does not exist at this office for anything else that doesn’t have to do with quarterly and year end taxes; it’s all a blur to be honest. Besides the obvious tax deadlines, there are always major changes at the start of any year. So far, 2020 has started with a bang. We are still reeling from yet another change in IGIC tax from 1st January (yes, it went from 7% in 2018 down to 6,5% in 2019 and well, why not put it back up to 7% in 2020?!), quarterly and year end taxes, and of course BREXIT and everything that will bring with it.
Anyway, moving on with the topic at hand, we are living in a technological age and Public Administrations are using these aids as a means to check up on our personal situations and whether or not we are complying with our legal obligations as either citizens or business owners. How are they doing this?
Well, as a Member State of the EU, Spanish Authorities have the ability to contrast information on other EU databases in an attempt to find people who live in the country but do not declare their true situation, which could be perceived as tax evasion. There is also the automatic exchange of information which is global under the Common Reporting Standard to think about. This does not imply deliberate attempts to defraud the Tax Office, but as is heard often here, “ignorance of law does not exempt you from it”.
Uncertainty still abounds regarding residency and fiscal residency in Spain, and it is a question that comes up again and again. I have seen cases of people who did not know they were registered as tax residents in Spain, therefore with the obligation to declare and others who try to be “clever” by straddling two countries and not declaring correctly in either and those who prefer to ignore the situation and do nothing. Many think that by merely obtaining the green residency card, they are residents, but it is a little more complex than that as you will see, and others do not consider the implications of applying for residency in Spain.
The National Tax Office’s (AEAT) definition of a fiscal resident:
- You spend more than 183 days of the natural year in Spain (not necessarily consecutive days) and this premise is not reliant on being officially registered here. Temporary absences are not taken into consideration in this calculation if you can prove you were formally registered as a tax resident in another country for over 183 days.
- Spain is your centre of vital interests, which means the primary base for your economic or professional activities
- Your spouse resides in Spain (you must not be legally separated), even though you yourself may spend less than 183 days of the year here
- You have declared in your previous country of residence your decision to transfer your primary residence to Spain and as a result, you are liable to pay tax or your worldwide income and worldwide assets here. If there are double taxation treaties between Spain and your country, they would come into effect
Living between two countries is not an issue as long as you are sure which is your primary residence (where you spend more than 183 days), because your taxes must be paid in THAT country if you do not wish to fall foul of the law. When you obtain your green residency card (civil residency certificate), you must also register at your local Town Hall on the padrón; this is the Municipal Census, which is a big deal because in effect you are stating you are a resident in Spain. Unfortunately, some people take these steps without realizing what they really mean. Once this has been done, you must inform the AEAT of your new residency status, which should include advising the authorities of your previous country of residence, which in any case is required to transfer health systems. This is crucial because it can prevent potential complications with capital gains, inheritance tax etc. Residents may also be liable to file Foreign Assets Declaration on Tax Form 720 which is an informative declaration of assets situated outside Spain in excess of 50.000 euros.
Residents of Spain are liable to declare their worldwide wealth on their Personal Income Tax Return and in the event of dispute between two countries the relevant authorities must come to an agreement regarding that person’s tax residency. Personal Income Tax is obligatory to non-business owners if you exceed the annual threshold established by the AEAT or if you have two or more sources of income (exceptions apply). Double taxation treaties apply if some tax is charged at source as in the case of some pensioners.
Possession alone of a green residency card is not absolute proof of your status in Spain. This is merely a document that shows civil residency, but there are two factors, (1) some people have obtained these certificates in the past when the procedure was not as strict, and they should have never been issued and (2) the number of people who do not advise the authorities when leaving Spain. Some prefer to declare even if their income does not reach the threshold, to consolidate their fiscal status (relevant when selling property for example). It is surprising the number of cases I have seen of people who have resided on the island for years, yet the AEAT has no record of them besides initial registry. Registry on the municipal census once upon a time is no guarantee either and, in La Oliva, at least, there has been a big crackdown which resulted in the removal of more than 3.000 habitants.
As you can see the AEAT is hot on the trail for those who reside here to legalize their affairs. Data sharing between Public Administrations is becoming easier, so the AEAT can pick up on anomalies faster than before so my advice would be to verify your own situation and make sure you are on the right side of the law.