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27.03.2019

New rules for determing tax residence between Spain and Gibraltar

Recently it has made known the content of the International Agreement (the “Tax Agreement”) on taxation and the protection of financial interest between the Kingdom of Spain and the United Kingdom regarding Gibraltar –this Note is particularly aimed to address the main tax measures approved concerning both individuals (“Individuals”) and/or companies or any other legal entities (“LE”).

1. INTRODUCTION

At the time of issuing this Note, we are not aware whether both countries, Spain and UK, have effectively singed the Tax Agreement to all intents and purposes. In fact, the Tax Agreement has not been officially published in Spain (BOE) yet.

It is though confirmed its approval by the Spanish Council of Ministers, upon the meeting on 15 March 2019. Over the press conference following the Council of Ministers, the vice-president of the Spanish Government, Carmen Calvo, highlighted that the Tax Agreement is intended to “delete tax fraud and the harmful effects derived from the features and particularities of the Gibraltar tax regime” as well as establishing clear rules to resolve residency conflicts of tax residence concerning individuals.

In this regard, the Spanish Government has explained that, in Article 2 of the Tax Agreement, especial rules for residency of Spaniards have been introduced “in line with the Tax Agreement between Monaco and France not allowing to the nationals of the latter State (Spaniards, in our case) to become Monaco tax residents (Gibraltar tax residents, in our case) if they move their residence after the signature of the Tax Agreement”.

 

2. TAX RESIDENCE OF INDIVIDUALS

2.1. New tie-break rules between Spain and Gibraltar

 

Prior to paying attention to the special criteria set up for the purposes of determining Individual’s tax residence in the event of tax residency conflict between Spain and Gibraltar, it has to be warned that primarily each of their domestic legislation shall apply (1).

As far as Spain is concerned, the main rule governing Spanish tax residence’s criteria for Individuals is Ley del Impuesto sobre las Personas Físicas (“LIRPF”), which is as follows:

 

 

Accordingly, those Individuals not meeting the circumstances above are not to be considered Spanish tax residents (“STR”).

However, there are a number of scenarios in which, in light of the LIRPF criteria set out above, the Kingdom of Spain may be willing to challenge the effective tax residence in relation to an Individual who is legally deemed Gibraltarian tax resident (“GTR”).

In this regard, the Tax Agreement is intended to be applied as a “tie-break” rule for those cases in which both jurisdictions (Spain and Gibraltar) consider a certain individual as tax resident in light of their respective domestic rules.

Nonetheless, it has to be highlighted that these new tie-break rules show a marked tendency so that, in the event of tax residency conflict, to solve the issue in favour of Spain (i.e. STR).

In particular, Article 2.1.b of the Tax Agreement foresees the following:

 

 

In light of the above, our first conclusion is that for a GTR it will be key to avoid any situation that may give rise to a conflict concerning his/her tax residence status since, if and when the rules of the Tax Agreements are to effectively apply, he/she would have little room to avoid a STR status.

As a matter of fact, such doubtful scenarios, in our experience with the Spanish Tax Authorities, may potentially include a wide range of reasons and facts, to be analysed on a case-to-case basis (even where, theoretically, they should not be deemed a particularly worrisome situation from the letter of the law in relation to Article 9 LIRPF) such as the following, among others:

- Obtaining relevant Spanish-sourced income or owning relevant assets or economic interests in Spain.
- Having the family unit (or a certain dependant family member) still leaving in Spain.
- Spending less time in the other jurisdiction (Gibraltar in the case at hand) than in Spain, even though no more than 183 days are spend in Spain.
- Owning housing (whether as a landlord or as a tenant) available to themselves and using it frequently.
- Being unable to show solid proof concerning an alleged tax residence in a country other than Spain and, particularly, unable to contribute to the Spanish Tax Authorities (after the latter request, if any) a certificate of tax residence from the relevant foreign jurisdiction (2).

In addition, when not facing a clear-cut tax position, these new tie-break criteria creates the possibility that a Gibraltar-born Individual who has lived in Gibraltar for their entire life shall suffer an automatic loss of their GTR (“iure et de iure”) (3) in favour of a Spanish tax residence as soon as they marry—or even begin a new relationship—with someone (be they a Spanish national or otherwise) who is a Spanish tax resident (4).

With the above being said (and subject to proper interpretation by the Joint Committee and observation of how this new rule develops in practice), we understand that—possibly due to the parties entering into the Tax Agreement being aware of how unfair and disproportionate it could be in the case set out above—it may have a specific intent due to the fact that the abovementioned rule refers to “habitual residence in Spain” rather than the “Spanish tax residence” of the first spouse (5)

 

2.2. New “tax quarantine” scenario for (non-Spanish nationals) STR

 

The Tax Agreement also includes a new scenario of “tax quarantine”, consisting of a 4-year period—during which the STR status will be retained (6)—  for those foreigners (non-Spanish nationals) who, as STR, move their residency to Gibraltar (7).

Over this period (i.e. at least 4), these Individuals moved to Gibraltar will be obliged to continue to be taxed in Spain as if he/she still was a STR –only upon the expiration of this period, they may effectively become a GTR.

This provision will not apply to (i) non-Spanish nationals having spent in Spain less that one complete tax year in Spain and (ii) registered Gibraltarian that have spent less than four years in Spain.

By way of example, this retaining of the STR status over for (or five) years will affect British citizen –or any national from a country other than Spain, whether EU country or non-EU country– who, after having been out of  in Spain for more than one year, opted for moving to Gibraltar.

 

2.3. New (impeditive) situation for disallowing the GTR to Spanish nationals

 

In parallel to the above, for the very first time, Spanish nationality may imply an insurmountable obstacle to avoiding having to pay tax forever in Spain despite the taxpayer removing every single link with the Spanish territory.

The following example serves to illustrate the practical effects of this new provision: 

- A Spaniard who moves to Gibraltar in the future—even if they never returns to Spain, or have left no assets or family ties whatsoever within Spanish territory—will continue to be deemed a Spanish tax resident in light of the Tax Agreement.

- Only if, at some point in time, the same taxpayer moves from Gibraltar to a country other than Spain, would they be able to cease paying tax in Spain.

- However, if this same taxpayer ever returned to Gibraltar, they would once again be subject to IRPF as a Spanish tax resident. In conclusion, the key element is that such an individual can never be deemed a Gibraltarian tax resident while they are a Spanish national.

In addition, and also in quite a peculiar manner, the Tax Agreement refers to its effective date as coinciding with the date of the signing of the Tax Agreement (the “Effective Date”) in relation to the provision establishing that Spanish nationals who move their residence to Gibraltar “after the date on which this Agreement is signed”, will be considered Spanish tax residents in any event (8)

In this regard, it is worth mentioning that—perhaps with the intention of further limiting the possibility of an immediate departure of Spaniards to Gibraltar—the Tax Agreement does not use the wording “acquisition of tax residence”—or “the tax period in which tax residence is acquired”, as is typical—but literally refers to the “transfer of the tax residence” to Gibraltar as the milestone for the purposes of determining whether or not the taxpayer has anticipated the Effective Date.

Notwithstanding the above, we would be in favour of developing a possible systematic interpretation of this provision —according to the non-resident taxation system (9)—, which shall prevail beyond its mere literal wording.

Under this systematic interpretation, it should be considered that any transfer of fiscal domicile by an Individual to a new jurisdiction is considered to have taken place on 1 January of the year of the transfer (as tax residence, in Spain and in practically any other jurisdiction, is attributed for complete calendar years (10))  if and when that Individual in question ultimately spends —by the end of that calendar year—over 183 days (or overnight stays) in the destination jurisdiction.

In light of the above:

- It could be explored what would happen in a hypothetical case in which a Spaniard (STR for 2018) moved —after the signing of the Tax Agreement but as soon as possible within the first Semester of 2019— from Spain to Gibraltar along with their family and spent the rest of the year there (i.e. over half a year) while not owning any relevant assets in Spain. Then, would it be defensible, with a fair degree of confidence, that their transfer to Gibraltar could be deemed as previous to the Effective Date?

- That being said, we believe that it may be complex in practice for any taxpayer in that situation to try and defend this argument before the Spanish Tax Authorities, and that the latter are likely to mainly focus the discussion on whether or not they are able to present a copy of Form 030 (Modelo 030), sealed prior to the Effective Date, declaring the change of tax domicile to Gibraltar.

 

3. TAX RESIDENCE OF LE

3.1. New criteria that may lead to a STR status

 

One again, we must start by paying attention to the criteria establishing where –according to Spanish domestic rules, for Corporate Income Tax (“IS”) purposes in this case– a certain LE must pay tax in Spain (as STR):

 

In this regard, it calls our attention that, in relation to LE, the Tax Agreement does not foresee –at least not explicitly– that primarily the domestic legislation (from Spain or Gibraltar) shall apply (unlike the way this is foreseen by the Tax Agreement in relation to Individuals). In other words, Article 2.2.a of the Tax Agreement –to be further analysed below–does not limit its application to provide tie-break rules for solving conflicts of tax residence.

Consequently, it could be interpreted that, even where no tie-break is needed (v.gr. if the Spanish IS rules by itself were not allowing to consider a certain company as STR), that the Tax Agreement could be directly applicable to determine the LE’s tax residence (STR vs. GTR).

In particular, the criteria under the Tax Agreement are the following:
 

 

However, a provision in the Tax Agreement allows entities in Gibraltar that existed before 16 November 2018 (11) not to face conditions (iii) and (iv) as insurmountable obstacles, provided that they can show they met all the following criteria as at 31 December 2018:

  • a. The LE must have a fixed place of business in Gibraltar through which the business is wholly or partly carried out with adequate staff (number and qualifications) and expenditure to support its core income-generating activities;
  • b. It is liable to and has paid corporation tax in Gibraltar according to the tax rate applicable therein under Gibraltarian tax rules (currently, at the rates of 20% or 10%);
  • c. It has operated in Gibraltar from its incorporation to 31 December 2018 and there has been no interruption or change in its trade since 1 January 2011;
  • d. More than 75% of its income for the last financial year before 31 December 2018 accrued in and derived from sources in Gibraltar; and
  • e. It has, for the last financial year before 31 December 2018, an amount below a defined percentage of its income that accrues from sources in Spain. The percentage varies according to the entity’s annual turnover and are as follows (12):

 

 

In any event, the aforementioned measures, due to their specificity, newness and importance, will need to be analysed on a case-to-case basis so that the best solution can be found, where possible, for those taxpayers who are straddling Spain and Gibraltar.

 

Written by Albert Mestres, Tax counsel at Toda & Nel-lo

 

1. In particular, it is established in paragraph 1.a of the Tax Agreement, as follows: “Natural persons shall be tax resident in Spain or in Gibraltar in accordance with their domestic law, including rules regarding the issuance of tax certificates confirming residency and subject to the following rules only in cases of tax residency conflicts”.
2. Theoretically, since some years ago, it is a clear-cut issue in Spain according to relevant case law (v.gr. Resolution issued by the Economic-Administrative Regional Court of Madrid on 20 December 2010) that is not a “sine qua non” requirement to obtain a certificate of tax resident from a country other than Spain to be in a position to show that a certain Individual is not a Spanish tax resident. Accordingly, since there is not a fixed catalogue concerning types of proofs are not “numerus clauses”, any means of proof could be appropriate for the sake of showing a foreign tax residency vis-à-vis with the Spanish Tax Authorities. This said, we are not in a position to totally rule out that Spanish civil servants can in practice show reluctance where no foreign tax certificate is contributed.
3. In this regard, by way of exception, it is introduced a breakdown of the system of rebuttable presumptions (“iuris tantum”) –i.e. applicable unless evidence to contrary is shown–  in relation to family links kept in Spain by those individuals which leave the Spanish territory to reside in another jurisdiction: it is established a non-rebuttable presumption (“iure et de iure”) in relation to Gibraltar –hence, with no room for evidence to contrary– where tie-break rules are to be applied to solve a tax residency conflict between Spain and Gibraltar. Accordingly, the discussion should ideally happen in a previous stage, which means that the Individual, as the case may be, shall try to argue that he/she is not even in a situation to be solved by tie-break rules as an undoubted GTR.
4. Conversely, one may assume that if the Gibraltarian spouse has a clear-cut GTR status (v.gr. owns no relevant assets or economic activities in Spain, etc.), his/her marriage would not imply an automatic loss of the GTR status even if the Spanish spouse continues to reside in Spain, since the Gibraltarian spouse shall still be in the position (still in the framework of the Spanish domestic rules) to show (“iuris tantum”) he/she is not a STR (and hence, trying to avoid the actual application of the Tax Agreement, under which he/she would be reputed STR).
5. Accordingly, by distinguishing between “habitual residence” (factual perspective) and Spanish “tax residence” (strictly legal perspective) some room shall exist for Gibraltarian not to suffer a “drag along” effect by the STR status of that Spanish spouse which habitually resides in Gibraltar (but being denied a GTR status because of being a Spanish national), as set out in Section 2.3 below); should that be the case, the Spanish spouse will continue to pay tax in Spain, but without prejudicing the Gibraltarian spouse’s tax status.
6. In practice and depending on the case, this could be a 5-year period, since the rule establishes that this “shall apply in the tax period in which the change of residency is made and during the four subsequent tax years”.
7. This should not be confused with the classic “tax quarantine” –for a 4-year period as well– foreseen in Article 8.2 LIRPF that may apply to Spanish nationals moving from Spain to a included in the tax haven blacklist jurisdiction.
8. This seems to contradict the reality generally derived from the Tax Agreements entered into by two states, in which the typical and logical process is that the effects become applicable on the date of entry into force, at the earliest.
9. To clarify, by this non-resident taxation system we mean both (i) the national regulations (such as Spanish domestic legislation) and (ii) the system applicable on a cross-border basis (under those international tax criteria established in the framework of the OECD, which are also applicable in Spain by way of soft law).
10. This said, it shall be considered how it could affect in the case at hand that in Gibraltar the tax year is not the calendar year.
11. This being the date in which, approximately, the negotiations between UK and Spain started in relation to the Tax Agreement.
12. This amounts/ percentages to be determined according to Article 13 of the Spanish Non-Resident Income Act, and its subsequent amendments.