Many foreign nationals, including Britons, living in Spain fail to declare themselves to the tax authorities. This is sometimes because they do not realise they meet the tax residency criteria –
Many foreign nationals, including Britons, living in Spain fail to declare themselves to the tax authorities. This is sometimes because they do not realise they meet the tax residency criteria – they may, for example, incorrectly believe they are fiscal nomads. Others simply do not want to pay tax in Spain.
It is the responsibility of everyone living in Spain or owning property here to establish exactly what the tax rules are and how they apply to them, and then to complete their tax return correctly and fully each year as necessary. Residents are liable to Spanish tax on their worldwide income and gains and on any inheritances they receive, and their Spanish assets are also subject to Spanish succession tax when they die. Non residents have to pay tax on income or gains generated in Spain, and their property and other Spanish assets are liable to succession tax.
Tax evasion used to be a way of life in Spain, both among Spanish and foreign nationals, but the government is now much more savvy on the various ways people evade tax and considerably stricter about enforcing its taxation laws, and it has become more intrusive in the process.
Property tax fraud has been one of Spain?s biggest areas of tax evasion. Property owners in Spain are meant to pay income tax on rental earnings, declare any capital gains on the sale of a property, and also declare any liability to succession tax on inheritance or gift of a Spanish property. In addition there are local property taxes to be paid.
In 2009 it was calculated that 70% of rentals were not declared in Spain. The Ministry of Housing also estimated that there were around 2.2 million properties being rented out. Even without taking into account the likely increase over the past two years, this means that rents from around 1.5 million properties are not declared to the tax authorities.
With the government missing out on a valuable source of revenue, it is hardly surprising that it keeps coming up with new ideas to expose fraudsters. The Hacienda (the Spanish tax authority) has, for example, searched through property magazines and websites to find properties which are being let and the income not declared.
It now has another effective tool to use.
Electricity companies are now obliged to provide information to the Hacienda regarding the electricity consumption of every single property in Spain. The details given to the tax authority will include –
?Name of the person or organisation on the electricity invoice
?Name of the holder of the bank account from which payments are made
?Catastral reference and address of the property
?Amount of electricity used
This is a new obligation being imposed on electricity providers, who are making their first declaration in February this year with information relating to 2010.
The taxman will be able to use this information to detect electricity usage in a property, and will thus be able to determine if a property which is declared as empty is in fact being rented out or being used for business purposes.
This will also catch out people who are living in Spain permanently but who have not registered as such and have not been paying tax in Spain each year.
If they fail to submit a tax return for 2010 and the authorities pick up on this, they could investigate further and look back over the previous four years and impose penalties on those found guilty of tax evasion.
Under the Spanish tax laws, you are resident in Spain for tax purposes if you meet any of the criteria below, regardless of whether you take out a formal residence permit –
1)You spend more than 183 days in Spain in one calendar year. These days do not have to be consecutive. Temporary absences are ignored unless you can prove you were habitually resident in another country for over 183 days that year.
2)Your ?centre of economic interests? is in Spain.
3)Your ?centre of vital interests? is in Spain, for example, your spouse or minor children live here. In this case you are presumed Spanish resident unless you can prove otherwise.
There is no split year treatment in Spain; you are either resident or not resident for the whole tax year.
There are actually benefits to being tax resident in Spain. For example, if you own property or other assets in Spain they are liable to Spanish succession tax which, depending on who the recipient is and their personal net worth, can be very expensive. Unlike the UK, one spouse inheriting from the other will have to pay this tax. There are however State and Regional rules and rates for this tax. The Regional rules are much more beneficial and in some Regions can virtually wipe out the tax liability for some beneficiaries, but to benefit you have to be habitually resident in that region and paying tax there. If you have not declared yourself as tax resident, then the much more expensive State rules will always apply for your spouse/partner, children and other beneficiaries.
When it comes to income and capital gains tax on your investments, savings and pensions it is often possible to use legitimate tax planning arrangements in Spain to significantly lower your tax liabilities. You should always seek advice from a wealth management and tax planning adviser such as Blevins Franks.
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 must take personalised advice.
By Bill Blevins, Managing Director, Blevins Franks
22nd February 2011