On December 31st, 2003 the Official Gazette published the 2004 Finance Bill (Law 62/2003) which includes a number of significant changes in the field of international and non resident taxation. The introduction of a new and highly favourable tax regime for expatriates coming to live in Spain must surely rank as the most ground breaking. The new regime, albeit only applicable on the year of entry into Spain and during the next 5 years marks a new phase in Spain’s sustained efforts to improve the competitiveness of its tax system, now being spurned by recent changes in countries such as Portugal, Italy and Germany.
2. PERSONAL SCOPE OF THE NEW REGIME
The new regime is a voluntary one, which can be chosen by certain individual tax payers (not companies, partnerships or other entities) as an alternative to the ordinary worldwide taxation system, with respect both to Income Tax and Wealth tax. This regime bears remarkable similarities to a territorial system but its application, as opposed to classical territorial system (Costa Rica, Panama, Hong Kong, etc.) it only applies to long term foreign residents (be they foreign or Spanish nationals) coming to live and work in Spain. In order to qualify for the new regime a tax payer must meet all the following criteria:
1. Become a Spanish tax resident as a result of moving to Spain.
Thus somebody who is considered as a Spanish tax resident only on the basis of having in Spain his centre of economic interest or his business base but did not spend 183 days per year here would not qualify. In this respect it should be taken into account that temporary absence from Spain would be disregarded for the purpose of the 183 days test if trips start and end in Spain.
2. Not have been a Spanish tax resident during the 10 years previous to the one in which he becomes a Spanish tax resident again.
Although the wording is not clear it would seem that only previous residences based upon physical presence (and not the centre of economic interests) would disqualify somebody from the regime, as the text refers to the “new move into Spain”. This question could clearly do with some clarifications form the shortly to be issued regulations on the regime. It would be highly convenient if the standard of proof were to be clearly specified (i.e.: submission of successive tax certificates) so as to avoid future conflicts with the Tax Inspectorate. Previous residence in a tax haven are not excluded from the regime although proof of residence may be much more difficult for them, as Spanish Law would require proof of a 183 day stay per year in the relevant territory.
3. The move to Spain must be the result of a work contract.
Again the drafting raises doubts as to whether any work contract whose duties are discharged in Spain would serve for this purpose. Where the tax payer is not employed by his own company or his remuneration is puny compared with his other income sources the application of the regime may not be so clear out, although the wording of the article would seem to justify a more generous view (see below).
4. Duties required by the work contract must be effectively discharged in Spain.
This is a logical consequence of condition 3. If this is the case we believe that it would be difficult for the Revenue to challenge condition 3. as physical presence in Spain becomes a “condition sine qua non” for the job and thus it can be said that the move to Spain has been dictated by job consideration, notwithstanding the fact that the salary may not be that significant to a particular taxpayer.
5. The employer must be a Spanish resident company or entrepreneur.
This requirement tails with 4. above as otherwise it would be very difficult in most cases to prove that duties are discharged in Spain, especially on a long term basis.
6. Any employment income received must be taxable without exemption under the term of the Non Resident’s Tax Law (Ley 41/1998).
Obviously this condition is predicated on the theoretical assumptions that the tax payer is not a Spanish resident in which case is only possible if duties are discharged in Spain.