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Are you living abroad and wondering where you are “tax resident”? Your residency status may sound bureaucratic, but it has a tremendous impact on where you pay taxes, how much and in what manner. Indeed, oversights in this area can be very costly – as we will see below from some celebrity case studies!
Below, our financial advisers explain the key variables that can determine your tax residency status – specifically focusing on the British national relocating to Spain. We hope this information is helpful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu
What is tax residency?
For the ordinary British person, most of their time is spent living and working in the UK (barring perhaps a bit of travel during the year). They pay taxes to Westminster and perhaps to Holyrood if they live in Scotland. The matter tends to end there.
However, things get more complicated when you live abroad or spend a lot of time overseas. What if your family home is in the UK, but you spend most of your time travelling abroad for work? What if you live overseas but retain significant economic ties back home (e.g. you work remotely for a UK-based company whilst living in Spain)?
These matters are typically more complicated. Different governments may have competing claims as to how this individual should be taxed. To resolve disputes and provide clarity to taxpayers, most countries have developed “tax residency” rules – often coordinating them using international treaties such as double taxation agreements (DTAs).
How does tax residency work in Spain?
In Spain, an individual is usually deemed to be a Spanish tax resident if they spend at least 183 days in the country within a given calendar year.
A case study is the Shakira tax investigation. In 2012, Spanish prosecutors opened a case against the Columbian singer for not paying €14.5 million in taxes. The case centred on Shakira’s tax residency status. Prosecutors argued that she had ceased to be a resident of the Bahamas between 2012 and 2014 and so should have been paying tax in Spain.
This case was eventually settled with Shakira paying a €7.5m (£6.5m) fine. However, it shows the potential seriousness of making mistakes with your tax residency status. Expats can be guilty of assuming tax matters are unimportant or that pleading ignorance will be a reasonable defence. However, failure to plan your finances can result in severe penalties.
Where should I base my tax residency?
It is not just the number of days spent in Spain which can designate someone as a tax resident there. You could also be deemed a Spanish tax resident if your centre of activities or economic interests are regarded as based in Spain.
For instance, a digital nomad could spend 184 days travelling the world in a calendar year. However, if the freelancer owns their home in Spain, holds most of their assets there and conducts most of their business there, they may still be regarded as a Spanish tax resident.
Things get complicated when other countries’ tax residency rules come into play. For instance, a British expat living in Spain will be considered a UK tax resident for a given tax year (which runs from April to April!) if they meet any of the “automatic residence tests”.
The automatic residence tests can be a source of great anguish for British nationals (and financial advisers!), as they are very complicated and can lead to confusion. For instance, if all of an individual’s homes are in the UK and they have spent 30 days or more there, then the individual is considered a UK tax resident. Yet what does this mean for the British expat who spends most of a UK tax year travelling around Spain but also spends 30 days resting in his UK home periodically?
In such cases, it will help to seek professional advice to explain some finer details (e.g. about DTAs). Whatever your current circumstances, it will help to speak with a financial adviser to ensure you understand your position right now – and, how it could change based on future decisions, such as travel plans.
Tax residency rules can be a burden. However, they can also present exciting and legitimate tax-saving opportunities if you plan carefully. For instance, one of our other posts discusses the pros and cons of Beckham’s Law; a special tax regime available to certain foreign workers in Spain. Suppose a British expat successfully applies to the scheme and earns a significant Spanish-sourced income for five years before relocating overseas again.
In this example, the individual could earn up to 600,000 Euros (£505,261) which would be taxed at a flat rate of 24%. Alternatively, had the individual earned this income as a UK tax resident, they might have paid the Additional Rate of 45% on most of their earnings.
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu