The Spanish Directorate General of Tax has ruled that any time spent in the country because of coronavirus will count towards determining an individual’s tax residency.
The move stems from a ruling regarding a Lebanese family which was in Spain when the government declared a state of emergency.
As a result, the time the Lebanese family spent in Spain due to the lockdown will count towards their tax residency, according to law firm CMS.
Under the Spanish Personal Income Tax Act (Pit), individuals are considered tax residents if they spend at least 183 days in a calendar year on Spanish soil.
Scrapping guidelines
The decision, however, goes against the Organisation for Economic Co-operation and Development’s (OECD) recommendation in its ‘Analysis of Tax Treaties and Impact of the covid-19 crisis’ guidelines.
The OECD said that periods of time spent in a country during the state of emergency brought by the coronavirus pandemic should not be taken into account when determining tax residency.
Other countries, such as the UK, Ireland and Australia, have adopted the OECD’s guidelines.
This means that if an individual has spent more than 183 days in Spain during 2020, including the lockdown months, they will be taxed under the Pit and Spanish Net Wealth Tax on a worldwide basis, CMS said.
Not clear cut
Diego De Miguel Hernando, partner, and Ricardo Hector Lorca, counsel, at CMS in Madrid, said: “The criterion followed by the Spanish Directorate General of Tax considers, at least indirectly, that the Lebanese family voluntarily decided to spend part of the 183 days in Spain.
“On the other hand, in an extreme case, where the circumstances oblige a specific individual to spend more than 183 days in Spain regardless of a voluntary decision – eg poor health – it would be reasonable to defend that the days spent in Spain should not be taken into consideration for tax residency purposes.
“However, this is not a clear-cut issue and the likelihood of claims arising between the Spanish tax authorities/courts and taxpayers will be high.”
Inheritance and gift tax at risk
But the ruling may not apply to everyone, because the Spanish Directorate General of Tax said that there is no double tax treaty between Spain and Lebanon, and that Lebanon is a tax heaven for Spanish tax purposes, which are the two reasons underpinning the ruling.
De Miguel Hernando and Lorca continued: “However, there is no mention of these issues in the Directorate’s conclusions. In other words, the 183 days would be sufficient for determining tax residency in Spain, irrespective of whether, at a subsequent stage, the provisions of a potential double tax treaty could be invoked.”
They added that, under the Directorate’s current stance, Spanish inheritance and gift tax will also be imposed under the current ruling.
