Earlier this year, an important case was decided by the Spanish General Directorate of Taxes (DGT). It ruled that, in certain circumstances, a foreign citizen living in Spain and working remotely for a non-Spanish company is liable to pay Spanish tax on their full income. This sets a new precedent for the residency and taxation of international remote workers in Ibiza (and the rest of Spain). Ibiza, being a brand-name (property) market, is enjoying a true “demand boom” which for an increasing part is caused by people that are choosing for this island, to live on and (partially) work from.
To contextualise the significance of this case, we need only look at the increasing numbers of people who are working remotely, taking advantage of the following benefits:
- Enjoying a lifestyle that provides the flexibility to travel.
- Retaining core working relationships remotely.
- Formulating sustainable and effective working practices that provide a strong work-life balance.
With remote working becoming ever more popular, especially since the onset of the global pandemic, the question of taxation for foreign residents working predominantly in another country has become less clear-cut. A ruling such as this was therefore essential to create a clear way forward for taxation.
Specifics about the taxation of remote workers in Ibiza (Spain)
A UK citizen was offered a job by a company in the UK but was permitted to work remotely in Spain for part of each year. The UK company stipulated that the worker was required to spend at least 91 days per year in the UK.
As the worker would be resident in Spain for part of the year working for a British company, the DGT was asked to rule on whether the worker should pay Spanish or British taxes, and also to provide guidance on how to avoid the worker being taxed in both countries simultaneously.
Is the worker resident in Spain for tax purposes?
After consulting pre-existing Spanish legislation, two criteria were put forward. If either one of these two is met, it was ruled that the worker’s full income would be liable for tax in Spain. These criteria are:
- The worker spends at least 183 days per year in Spain.
- The majority of work that generates the worker’s income, either directly or indirectly, takes place in Spain.
Regarding double taxation, because, in this case, the company was British, there was a risk of the worker paying tax in both countries. However, according to Article 15 of the Model Agreement to Avoid Double Taxation, the worker could only be taxed in Spain, despite the fact they are working for a company in the UK.
Foreign workers with residency in Spain for tax purposes may also need to submit a Modelo 720 declaration, available via the Spanish tax agency. Although not strictly a tax declaration, this is a mandatory declaration of assets that foreign workers who are classed as tax residents in Spain may need to complete.
What happens if the worker isn’t resident in Spain for tax purposes?
If neither of the two criteria applies to the worker, then Spain can only request taxes for work that was done whilst remote working in Spain, not on the worker’s full income. Also, in this case, it would be the responsibility of the worker to ensure their correct taxation status in the UK.
General taxation regulations for remote workers in Spain
An increase in the numbers of remote workers in Spain has forced tax authorities to revisit regulations around the taxation of companies. In response, they have stipulated that:
- Companies must register for IAE (tax on economic activities) if they have permanent premises in Spain.
- Companies do not need to register for IAE if they have remote workers in Spain, but no premises.
Penalties for tax evasion
Whether done intentionally, or accidentally, tax evasion is taken very seriously in Spain, and the associated punishments can be tough.
Therefore, in closing, we strongly recommend that you consult with an expert who can ensure you’re paying the correct tax for your personal situation, as well as advising on the completion of the necessary paperwork to meet legal requirements.
