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Tax domicile disputes arising from international mobility
On September 19th, as part of the ESADE Alumni law refresher programme, Jesús Romero, partner in the tax department at Crowe Horwath and professor in the international tax expert course at ESADE, gave a talk about changes in Spain’s regulations regarding international taxation, how the authorities define a taxpayer’s domicile, Spain’s courts and inspection bodies, and the different options open to taxpayers.
The speaker began by explaining that it is not illegal to change one’s tax domicile, but because criteria vary from one jurisdiction to another the definition of tax domicile is an essential issue that determines whether an individual should pay tax in their country of residence according to their income and world assets. Similarly, non-residents in a given country would only pay tax on their income and assets related to that country. “The regulations governing the tax domicile of individuals are based on their personal and financial and their physical residence in a given country, said Jesús Romero.
To be precise, the status of natural persons whose main residence is in Spain is determined according to two criteria and one assumption. The first one is physical presence, i.e. a resident is anyone who lives in Spain for more than 183 days per calendar year. Periods spent outside Spain are classed as “occasional absence included in the days of residence in Spain, providing no tax domicile in another country is certified. “Such certification is not an easy matter because the Spanish authorities require a tax domicile certificate issued by the authorities of the other country as proof of residence there, Romero explained. He then pointed out that this criterion has been relaxed in recent years and that other proof of tax domicile abroad is now acceptable such as payrolls, school receipts, utility bills, outlay on rent, etc, all of which involve a large amount of documentation. “Efforts should, however, always be made to obtain the certificate, he said.
The second point is whether the taxpayer’s main hub of activities or economic interests is directly or indirectly in Spain. Thus, if an individual lives outside Spain but earns most of their income in Spain, or if Spain is where their assets are located, then Spain is their tax domicile.
And finally, on the basis of family ties, a taxpayer’s main residence will be assumed to be Spain if that is where their spouse, providing they are not legally separated, and any dependent children under 18 live.
It is usual to regard an individual as having their tax domicile in any country they move to permanently, and likewise in Spain if that is where their assets, sources of income or their family are. The same situation occurs in the cases of people who move to Spain, which can lead to their having two tax domiciles. These situations can be settled if the two countries involved have signed an agreement to avoid double international taxation. Spain has signed more than 100 agreements to avoid double taxation with other countries that set forth rules making it possible to settle disputes and to clarify, unify and guarantee the status of taxpayers engaged in economic activities in other countries. Disputes about domicile are therefore settled on the basis of permanent dwelling, focal point of an individual’s life, usual place of residence, nationality and, finally, the possibility of an amicable settlement.
Jesús Romero ended his talk by pointing out the need to plan for any possible loss of residence and explained some ways of mitigating its impact.