Spain has seen a marked increase in tax residence litigation in recent years, characterized by a significant increase in efforts by the tax authorities. These cases have increased sharply due to the Spanish tax authorities’ interpretation of the residency criteria.
Two conditions set out in Spanish tax law qualify an individual as tax resident in Spain. This is either because he stays in Spain for more than 183 days during a calendar year or because he has a center of economic interest in Spain.
An individual is also presumed to be tax resident in Spain if his or her spouse and minor children habitually reside in Spain.
Meeting one of the conditions formed a key aspect of last year’s high-profile tax case involving pop star Shakira. In a Nov. 20 agreement between Spanish prosecutors and Shakira, the Colombian superstar accepted a three-year prison sentence and a fine of 7.3 million euros (approximately 790 million yen). However, thanks to her clean record, she did not serve any jail time and her fine was replaced with a payment of approximately 432,000 euros.
The root of all this trouble can be traced back to the question of taxpayer residency.
From 2012 to 2014, Shakira chose not to file Spanish tax returns for personal income tax and wealth tax, claiming that her tax residence was in the Bahamas rather than Spain. However, her tax audit ended with a conflicting opinion of the Spanish tax authorities, showing that she was in fact tax resident in Spain during those three financial years.
This revelation led to the issuance of valuations totaling 14.5 million euros, which Shakira immediately settled. As the incident raised suspicions of tax crimes, the tax authorities escalated the matter by referring the case to the public prosecutor’s office, hinting at a possible crime against the national treasury, and initiating full-scale criminal proceedings.
The legal battle ended with the disclosure of an agreement with prosecutors, sparing Shakira the immediate threat of a five-year prison sentence and a staggering fine that could rise to around 87 million euros.
Shakira admitted that she had tax residence in Spain in 2012, 2013 and 2014, confirming the claims of the Spanish tax authorities. They based Shakira’s Spanish tax residency on a perpetuity basis, arguing that Shakira spent more than 183 days in the Spanish territory each year.
Tax authorities’ efforts
This is not a special case. The annual tax administration plan prepared by the Spanish tax authorities shows an increase in procedures related to tax residency. These plans outline tax aspects that should be checked every year. Our focus on tax residency procedures is reflected in our 2021, 2022 and 2023 tax management plans.
Regarding the permanence criterion, the tax authorities make use of the concept of “sporadic absence”, which allows days spent outside Spain to be considered as being in the country. To contest the classification of occasional travel as sporadic absence, proof of residence in the destination region must be submitted to the Spanish tax authorities.
Similarly, when applying the “economic interest” criterion, the Spanish tax authorities may apply this based on the existence of a person’s wealth in Spain, regardless of whether it generates income. Any connection to Spain can also be used to claim that income is earned in Spain, even if it is earned in another state.
Court intervention
Spanish courts have intervened to temper the regime’s enthusiasm on the tax residency issue. A landmark judgment of the Spanish Supreme Court on June 12, 2023 states that if a taxpayer submits a certificate of tax residence from another state under the terms of a double tax treaty with Spain, the Spanish tax authorities will To determine the individual’s tax residence, it is emphasized that the treaty’s tie-breaker rules must be followed.
This case law serves as a shield for taxpayers’ rights and emphasizes the importance of respecting the provisions of the Convention when determining tax residence.
These legal developments highlight the paramount importance of demonstrating evidence regarding a taxpayer’s residence.
Recommendations for non-residents
Two important recommendations apply to non-residents of Spain who spend limited time in the country, hold assets or earn income. First, note both the Spanish tax residency rules and the aggressiveness of the Spanish government’s approach in applying them. Second, if possible, obtain a tax residence certificate from another country under a double tax treaty that forces the Spanish authorities to apply tie-breaker rules.
Concrete evidence of tax residence in another state, especially by certificate, emerges as a crucial and influential factor in these complex situations.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author information
Diego de Miguel Hernando is a partner and Alejandro Garcia-Jarón is a senior associate at CMS.
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