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How has football influenced theregulations of a special tax residenceregime in Spain? asks LEONFERNANDO DEL CANTO.

España mañana

SPAIN IS CHOSEN by many in the UK as a countryfor holidays, a place to own a second residence andsomewhere warm to retire. Paradoxically, despite

having a very stable economy and reasonable livingstandards, Spain has not been successful in attractingexecutives to relocate their place of residence. This is partlybecause of a very onerous tax residence concept, whichhas recently been improved to allow greater mobility forexpatriates and impatriados, a new word used in the Spanishtax jargon to define executives taking residence in Spain.

Sport analysts were probably among the first to noticethe changes in legislation by seeing a considerable influxof international footballers taking Spanish residence. It isbelieved that the Government was under considerablepressure from football clubs to define a more flexibleconcept of residence to benefit international footballersmoving to Spain.

Footballers apart, it is clear that the intention of theGovernment was to increase the flexibility for internationalexecutives to opt in for Spanish tax residence. In 2005, anincreasing number of employees relocated to and becameresident in Spain under the new legislation. This legislationalready influenced foreign companies to relocate part oftheir operations to Spain, especially when the decisionmakers had an existing affection for the country.

Finally, in previous years, additional tax legislationfavouring expatriates has provided a generous exemptionof up to 60,101.21 Euros for works performed outsideSpain, if meeting certain statutory criteria, which are notthe object of this article; see Income Tax Act for SpanishResidents (Texto Refundido de la Ley del Impuesto sobre laRenta de las Personas Fisicas), s 7p tax exempted income.

Why come to Spain?International tax advisers will say that the following twofundamental criteria make the ideal tax regime:

� low tax rates for employment income;� tax exempt foreign income and capital gains.

The UK has historically honoured those two principlesby offering a good tax environment to non domiciles andnon-residents under the category of not ordinary residence.The Spanish Government, in an attempt to catch up withsuccessful practices in other jurisdictions, is now blazingthe trail of international mobility.

Before entering into the new legislation, I will discussbriefly the general tax residence regime for Spanishresidents.

General tax residenceThe general income tax regime defines taxable incomeand gains for Spanish residents on worldwide bases, withan income tax rate as high as 45%. The main statute is theIncome Tax Act for Spanish Residents.

Spanish residents are also subject to an annual wealthtax charge on all the worldwide assets up to 2.5% of theirvalue. The relevant statute is the Wealth Tax Act (Ley delImpuesto sobre el Patrimonio).

Finally, to complete the whole picture, but excludingindirect or local taxes, the Spanish resident’s assets will besubject to inheritance tax. This applies to Spanish basedassets and to any assets received by Spanish residents. TheSpanish inheritance tax system does not tax the estate ofthe deceased but the net assets or income distributed tothe inheritors, which will be largely dependent on theirresidence, except for Spanish based assets, which are alwaystaxable in Spain. It is also important to note that inter-spouse transfers are chargeable to inheritance tax. Therelevant statute is the Inheritance and Gift Tax, (Ley delImpuesto sobre el Patrimonio).

In summary, under the general tax residence regime,Spanish residents are taxed on all worldwide income, gainsor assets. This is not very attractive to internationalexecutives, as they prefer to optimise tax and protect assetsand investments sheltered in other jurisdictions.International movers, given the choice, will opt for thosecountries where lower tax rates and tax exempted foreignincome, gains and assets are applicable.

Special tax residenceThe Spanish Government, aware of the unattractive taxregime offered to international executives and employees,and the limitations to attract foreign investments, passednew legislation to promote a greater influx of impatriados.

This new special tax residence legislation, although verywelcome by the profession and many of their internationalclientele, presents several difficulties for its interpretationand implementation. It is expected that new regulations,plus directives from the Spanish tax office will come tokeep clarifying and completing this regime.

The new legislation can be explained to the UK adviserin the context of the resident but not ordinarily residentregime in the UK, applicable to foreign income and capitalgains. The main noticeable difference is that remittance offoreign income in the Spanish regime is not considered a

The scope to be treated as notordinarily resident extends up to

five full tax years in Spain.‘‘

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taxable factor and the scope to be treated as not ordinarilyresident extends up to five full tax years in Spain.

In broad terms, the only taxable income for theindividuals applying for this regime will be the incomegenerated in Spain. The legislation limits also the applicationof wealth tax to the assets located in Spain.

Paradoxically, the new definition of tax resident isincluded in the Income Tax Act for Spanish Residents, whilethe regulation on how the tax will be applied is containedin the Non Resident Tax Act (Texto Refundido de la Ley delImpuesto sobre la Renta de No Residentes).

Spain is a civil law jurisdiction and, as such, tax residenceis defined by statute, and not by case law as happens incommon law jurisdictions. Thus placing bits and pieces ofregulations defining residence in different statutes maycreate difficulties when trying to take a cohesive approachto the legal definition of tax residence.

Residence definedAs mentioned above, the statutory reference for residenceis found in Income Tax Act for Spanish Residents, s 9(5). Itdefines habitual residence in Spanish territory for thepurposes of income, capital gains and wealth tax. Furtherregulations, tax office opinions and case law help toimplement and clarify the concept of tax residence. Section9 needs to be interpreted in the context of double taxtreaties, when applicable.

The following is a translation of s 9(5):

‘Those individuals obtaining their tax residence in Spainas a consequence of moving to Spanish territory couldopt to pay their taxes either according to the Income TaxAct for Spanish Residents or to the Non Resident Tax Actduring the tax year when the change of residence occursand the subsequent five tax years, if the following conditionsare met:

� they have not been residents in Spain for the ten yearsprior to their moving into Spanish territory;

� they move to Spanish territory as a consequence of anemployment contract;

� the duties of employment are actually performed inSpain;

� the works are rendered for a Spanish resident companyor entity or for a non resident company withpermanent establishment in Spain;

� the employment income is not exempt from taxationaccording to the Non Residents Income Tax Act;

� the taxpayer choosing to pay taxes as a non residentwill be liable to wealth tax in relation to the assetslocated in Spain;

� the Chancellor of the Exchequer (Ministerio de Hacienda)will establish the procedure to implement the optionabove mentioned.’

Section 9(5) is self explanatory in terms of the mainrequirements applicable to the new tax regime. In addition,in June 2005 the Spanish Parliament passed new legislationintroducing ss 111 to 118 in the Regulations of the IncomeTax Act (Reglamento del Impuesto sobre la Renta de lasPersonas Fisicas), which further explain the implementationof this legislation. The Chancellor of the Exchequer andthe Parliament are likely to keep refining the legislation tomake it clearer, so it will be necessary to keep up with taxoffice opinion and upcoming case law.

Far-ranging analysisBesides the general analysis and specific calculations thatthe international tax adviser and his Spanish counterpartwill need to do to decide whether this regime could bebeneficial for clients, the following points should also beconsidered carefully:

� Existing tax residence and domicile of the individualand how the exit strategy will fit in current jurisdiction.

� Overall tax and financial planning strategy consideringinheritance tax and wealth tax potential charges in Spain.

� Definition of the duties of employment to be performed,including foreign duties to be executed outside Spain.Spanish legislation accepts that part of the employmentduties could be performed outside Spain. Thecomputation of days becomes of paramountimportance and, together with the previous two points,this may affect the decision as to whether to opt forthe general or the special regime. In this context, IncomeTax Act for Spanish Residents, ss 7p and 9(5) must beconsidered carefully before deciding which regime ismore favourable for the individual.

� Tax position of the company and potential taxequalisation strategies, transfer pricing issues and othercorporate tax issues typically applicable.

� Double tax treaty provisions to determine if the taxcertificate issued by the Spanish tax office will complywith the double tax treaty provisions.

Leon Fernando Del Canto is a practising English barristerand Spanish abogado specialising in Anglo Spanish tax andlegal issues. He wrote How to buy your home in Spain publishedby the Office of Commercial Affairs of the Spanish Embassyin London and has contributed to several publications andseminars. This article is a general guide only, and professionaladvice should be taken in specific cases.

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