Spanish courts clarify criteria to determine Spanish tax residence

Background

In recent months, TEAC (Spain’s highest administrative court) has issued several decisions shedding light on the criteria for assessing the Spanish tax residence of a taxpayer. These decisions address issues as diverse as the computation of the number of days to attract sufficient permanence in Spanish territory, the means of proof admitted in this regard and the relevance of assets held in Spain and abroad.

TEAC position

In a ruling issued on 28 March 2023, the Court set criteria on how the days a taxpayer is regarded as present in Spain should be counted. For the first time, the Court has held that calculation by reference to the actual hours, minutes and seconds an individual spends in Spain should not be taken into account. Instead, to the extent that the taxpayer spends part of a day in Spain, no matter how short such duration may be, it will be considered as a day of presence in Spain.

The flexibility accepted by the Court in this case in relation to evidence provided by the taxpayer to prove presence in Spain was remarkable. It is worth noting that in the case under analysis the taxpayer was claiming tax residency in Spain.

In contrast, in a previous ruling issued on 23 February 2023, where the issue concerned the evidence of tax residence in a different jurisdiction, the TEAC took a more restrictive approach. In particular, the Court held that in order to show that Spanish tax residence was lost, a certificate of tax residence issued by the tax authorities of another jurisdiction for the purpose of a double tax treaty needed to be provided as evidence.

Furthermore, in a ruling issued on 19 December 2022, TEAC affirmed that even if a tax residence certificate is issued by the authorities of another jurisdiction for the purpose of a double tax treaty and is provided as evidence, the individual may still be considered Spanish tax resident under domestic law. Only brief mention is made by TEAC in relation to the availability of the tie break rules established in the relevant double tax treaty. But what is most interesting in this ruling is the analysis made of what is called the “centre of economic activities”. The Court noted a distinction between productive wealth and passive assets, and confirmed that productive wealth prevails over passive wealth for the purposes of a tax residence analysis. In the case under analysis, to the extent that the taxpayer had real estate assets devoted to a business activity in Spain, the centre of economic activities was deemed to be located in Spain even though from a quantitative standpoint the most valuable wealth of the individual was located abroad.

Comments

The criteria derived from these rulings is a new development that adds more pressure on the hot topic of Spanish tax residence, particularly now that the introduction of the solidarity tax is incentivising many individuals to lose their Spanish tax residence. The different approach used by the Spanish Tax Authorities to assess the evidence provided by taxpayers, allowing flexibility to prove Spanish tax residence but restricting such flexibility in relation to proof of tax residence in another jurisdiction, is concerning. What is clear is that taxpayers must be in a very strong position to evidence tax residence abroad, not only with a corresponding tax residence certificate but also by considering all elements of their economic and personal activity, and, in particular, their assets remaining in Spain.

The good news for non-residents with passive wealth in Spain is the clarification of the criterion concerning the distinction between productive wealth and passive assets. This may lead to favourable results where the Spanish tax authorities attempt to argue the individual is Spanish tax resident due to the mere holding of non-productive, large real estate assets. However, taxpayers should look out for a long-awaited Spanish Supreme Court decision expected to be released shortly, which is expected to evaluate whether the mere holding of large real estate assets for recreational purposes may attract Spanish tax residence.