Understanding ‘lawful’ and ‘tax’ residence in Spain
Brexit has highlighted the importance of understanding and correctly following Spain’s residence legislation, and anyone who has not yet applied for a residence permit has new rules to navigate.
There are two different concepts of residence you need to be aware of and plan for:
* Lawful residence – your rights, as a national of one country, to live and work in another.
* Tax residence – the country which has taxing rights over your worldwide income, gains and wealth.
Getting either of these wrong could have serious consequences, such as being deported or facing a tax investigation, back taxes and penalties. On the other hand, if you take specialist advice and follow the procedures correctly, you can continue to live the dream in Spain and enjoy a long and secure future here, as UK nationals have done for decades. And Spain can be a more tax-efficient place to live than you may realise.
Lawful residence in Spain
If you were lawfully settled in Spain before the end of 2020 and hold an official residence card (whether the ‘green card’ or new TIE), you should have nothing to worry about.
UK nationals can continue to apply for residence in Spain, but you now do this as a ‘third-country national. This involves stricter requirements, more advance planning and paperwork, but is generally still possible provided you can support yourself. Work visas are harder to obtain now though, especially if you are self-employed.
Retirees can apply for a Spanish non-lucrative visa and residency permit, where you need to prove you have sufficient means to live in Spain without employment (plus other basic requirements). This commits you to spending at least half the year in Spain – you cannot apply for this visa and just spend a couple of months in your Spanish holiday home.
If you have capital to invest in Spain and want more freedom to spend as much or as little time here as you wish, you can apply for the Investor Visa or ‘Golden Visa’. You need to make a qualifying minimum investment in either Spanish real estate (€500,000) or other qualifying investment (€1 million or €2 million) along with other basic requirements.
Without a residence visa, UK nationals are only permitted to spend up to 90 days in any rolling 180-day period in the whole Schengen area, even if you own a property here. Those overstaying could be deported/prevented entry.
Tax residence and liabilities in Spain
You do not have a choice; you either are, or are not, a tax resident under the domestic rules. When applying for legal residence, you need to be aware of whether your tax status will change and prepare for this. Careful advance planning could help you save considerable amounts of tax in Spain.
Spanish tax residents are liable for income, capital gains and wealth taxes on their worldwide income and assets and subject to Spanish succession and gift tax rules. They are obliged to submit a declaration of assets outside Spain (Modelo 720) where the value exceeds €50,000.
You are resident for tax purposes in Spain if any of the following apply:
1) You spend more than 183 days in Spain cumulatively in a calendar year, whether or not formally registered. Temporary absences are ignored for this purpose unless you prove you are habitually resident elsewhere for over 183 days (by showing a tax residence certificate in another country).
2) Your ‘centre of economic interests’ is in Spain – the base for your economic or professional activities is here. If you earn more income or have more assets here than in any other single country, Spain will be deemed your centre of economic activity,
3) Your ‘centre of vital interests’ is in Spain. If your spouse and/or minor children live here you are presumed Spanish resident even if you spend less than 183 days here, unless you can prove otherwise.
The Spanish tax authorities carry out inspections on tax residency, particularly for high net worth individuals, and are focusing on this as part of their 2021‘Tax Control Plan’. If you meet any of the tax residence criteria, you must register for tax and submit annual declarations.
Residency in Spain is nothing to fear
Spain can still be everything you dreamed it would be. Take advice to secure the best residence permit for your circumstances and to meet your tax obligations. Then relax and enjoy your future in Spain.
If you are worried you will pay too much tax in Spain you may be surprised. The local tax regime provides opportunities for tax efficient investing; how you hold assets can make a significant difference to how much tax you pay. Speak to a cross-border wealth management specialist with in-depth knowledge of the Spanish tax regime, and who can provide holistic advice covering residence, taxation, estate planning, investing and pensions.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax
information has been summarised; individuals should seek personalised advice.