Mi casa es tu casa

Key points

  • The coronavirus pandemic brought into existence the term ‘nomad working’, and people moving freely between the UK and Spain has become the new normal.
  • Residence and domicile are defined differently in the UK and Spain and the tax authorities of both countries have increased their cooperation.
  • Anyone can inadvertently become a tax resident in both countries simultaneously but this doesn’t necessarily trigger tax residency.
  • Remember to accurately count the days you spend in the territory according to the country’s rules.
  • Tax residency is calculated differently in both countries.

Where is home in the digital age? It’s no longer just a physical address – it’s wherever our computers are. Since the 1990s, people have moved between Spain and the UK by choice more than out of necessity, calling themselves expatriates rather than immigrants. The coronavirus pandemic brought into existence the buzzword ‘nomad working’. This emerging trend is turning the freedom of movement into a highly sought-after lifestyle. It’s becoming the new norm. Therefore, it is important to know where home is.

With the rise of digital nomadism, tax authorities are becoming warier of how individuals perceive their residence and domicile, which are defined differently in the UK and Spain. Furthermore, the UK’s HMRC and Spain’s tax agency (AEAT) have increased their cooperation substantially since Brexit, building upon the annual common reporting standard (CRS).

Counting days in the UK and Spain

Tax residency rules vary significantly between the UK and Spain. Factors such as the length of stay (183 days) and the centre of vital interest are crucial in Spain. On the other hand, the UK’s statutory residence test (SRT) determines tax residency based on a person’s ties to the country. Furthermore, in a given year, anyone can inadvertently become a tax resident in both countries simultaneously. Having the right to live in either country or citizenship of the UK or Spain does not necessarily equate to tax residency in these countries. Obtaining residency in either country also does not automatically negate tax residency in the other.

To begin with, it is imperative to count the tax days of stay in any country. Any day spent in the UK by midnight is considered a tax day by the UK tax authorities. Conversely, Spain counts any time spent on Spanish territory, including Spanish waters, as a day. Thus, even if a person doesn’t stay overnight in Spain, any time spent there, including flights into and out of Spain on the same day, will count as a tax day.

Finally, the UK offers an option to split a tax year into the UK and an overseas part in certain circumstances, eg if the taxpayer enters or exits the UK part-way through the tax year. Since Spain does not offer this option, any income, gain, donation, or net asset owned during the residency year, which runs from January to December, may be taxed.

Statutory tax residency rules in the UK and Spain

After calculating the number of tax days in each country, we must examine the domestic tax regulations. The automatic overseas and the tests under the UK SRT are fairly direct when we are clear with the tax days. The complexity increases on applying the sufficient ties test (STT) when irregular UK presence patterns are involved. Finance Act 2013, Sch 45, and HMRC’s Residence, Domicile and Remittance Basis Manual (RDRM 10000) must be consulted at all times.

In Spain, the income tax law (Ley del impuesto sobre la renta de las personas físicas, IRPF) defines the criteria for tax residency in a Spanish tax year, which is aligned with the calendar year, beginning on 1 January, as opposed to the UK’s fiscal year, which starts on 6 April. Under article 9.1 of Spain’s income tax law (IRPF), tax residency is determined using three key criteria:

  1. 183-day rule: Tax residency in Spain is established if an individual spends over 183 days in the country within a calendar year. These days do not need to be sequential, and temporary absences are generally included unless tax residency elsewhere is proven.
  2. Centre of economic interests: An individual who doesn’t meet the 183-day criterion can still be considered a tax resident if their primary economic activities or interests, directly or indirectly, are based in Spain.
  3. Spouse and minor children residency: Individuals are presumed to reside in Spain if their non-legally separated spouses and dependent minor children are residents – unless evidence proves otherwise.

There are additional factors to consider when determining residency in Spain:

  • Sporadic residence and consideration of absences: A total of 183 days does not need to be consecutive when counting the 183 days. Generally, temporary or sporadic absences are included in the calculation, except when a person can demonstrate their tax residency by obtaining a tax residency certificate in another country. It is crucial to remember the idea of sporadic residency and to meticulously calculate the number of days spent in and out of Spain. If an individual occasionally visits Spain or travels frequently, they should pay close attention to these regulations to correctly determine their tax residency status.
  • The burden of proof in the tax system: Individuals who wish to be exempt from Spanish tax residency under the 183-day rule must provide proof of tax residency in another country that has a double taxation treaty (DTT) with Spain. Additionally, to prove that they are not Spanish tax residents, the individual must show that they have not spent up to 183 days in Spain.

A few notes on domicile

The tax concept of domicile in the UK refers to the place where a person has their permanent home or principal establishment and to which they intend to return whenever they are absent. The determination of UK domicile will be decided legally considering key factors, such as domicile of origin and choice, residence history and plans, family and social ties, business and employment links, property and investments, nationality, formal declarations, and lifestyle (make reference to Shah [2023] (TC8842)).

Tax domicile in Spain does not have the same meaning as in the UK. Domicile (domicilio in Spanish) refers to the registered address of a person for tax purposes. As per articles 48.1 and 48.2 of the Ley General Tributaria (Spanish tax code), an individual’s tax domicile is the address used in interactions with tax authorities, usually their habitual residence or the location of their primary business activities. This definition is crucial for the notification and processing of tax-related processes.

Last, the term domicile is included only once in article 4.1 of the DTT, which must be understood as tax residence and not domicile as defined in UK tax law.

Double tax treaty framework

Individuals can sometimes be tax residents in the UK and Spain under each country’s tax residency rules. Article 25 of the DTT outlines the procedure for resolving a double tax treaty dispute between the UK and Spain. The timeframe to activate this process is three years, and it is advisable to seek counsel to determine and document the residency position before starting the process. The first step is a consultation between the taxpayer and the tax authorities of the country where the person is a resident or a national. During the discussion, the tie-breaker clause set out in article 4 of the DTT will be considered:

  1. Typically, a person is deemed a resident of the country where they maintain a permanent home, as determined by each country’s internal rules. If they have a permanent home in both countries, residency is assigned to the country where they have stronger personal and economic connections (centre of vital interests).
  2. If one does not have a permanent home in either country or cannot pinpoint the country of one’s centre of vital interests, they are deemed a resident of the country where they habitually live.
  3. Additionally, if they habitually reside in both or neither of the countries, residency is determined by the country of their nationality.
  4. Whenever a person holds nationality in both or neither country, the matter is resolved through mutual agreement by the competent authorities.

If the dispute cannot be resolved through consultation, the taxpayer can request the activation of the mutual agreement procedure (MAP) for the two tax authorities to resolve the dispute. It is important to note that the MAP does not suspend the tax payment, and the taxpayer must generally pay or guarantee the tax due.

The shifting dynamics of tax residency and domicile between the UK and Spain represent a significant challenge for Anglo-Spanish professionals. With an estimated 800,000 to one million UK citizens owning property or living and working in Spain, we need a robust understanding of domestic tax laws and double tax treaty regulations.