Noticias de la Cámara
The Double Tax Treaty between the UK and Spain and its’ post-Brexit effects | T.K & Partners
25/05/2022
A Double Tax Treaty (DTT) is a bilateral agreement between two countries which has as its’ main purpose the avoidance of double taxation on the same benefit and/or profits. Although DTTs are part of the International Public Law, as they govern the relations between two countries, they affect directly the physical persons who are either holders of a double citizenship or reside in one country and/or produce income in the other country. More concretely, this type of agreements are designed for the protection of both governments’ taxation rights, in terms of the avoidance of tax evasion, as well as the citizens’ rights, as physical persons and private legal entities are secured before the potential risk of double taxation on the same taxable income.
Due to the UKs’ decision to exit the European Union, a significant amount of questions have been brought to the attention of the EU Commission regarding the post-Brexit situation in connection with such bilateral intergovernmental agreements and the answer is actually quite straightforward. DTTs are not part of the EU legislation, as they can be concluded between any Member State with another Member State and/or a third country, which is not a member of the EU. Thus, the DTT between the UK and Spain is not affected and remains in force, as ratified between the two countries.
The key matters which are governed by the legal document are more or less the same for both parties of the Agreement, however there are slight differences, as such:
I.) Spanish taxes governed by the DTT between the UK and Spain:
i) Income Tax
ii) Corporate Tax
iii) Non Resident Income Tax
iv) Wealth Tax
Whereas,
II) UK taxes governed by the DTT between the UK and Spain:
i) Income Tax
ii) Corporate Tax
iii) Capital Gains Tax
The main question which arises is the determination of the tax residency of a physical person who spends time in both countries. In order to do that, it is crucial to verify what are the terms and conditions of each country, party to the Agreement, for consideration of an individual as their tax resident.
I) Tax residency under Spanish Law is determined under one of the following terms:
i) Physical presence in the country for more than 183 during a tax year;
ii) Main economic activities and/or interests are operated and/or located in Spain;
iii) Presumption of residency in the event that ones’ spouse and/or minor children are residents in Spain, however contrary evidence can be presented to the National Tax Authorities in order to prove otherwise.
II) Tax residency under UK Law is determined and can be automatically presumed under one of the following terms:
i) Physical presence in the country for more than 183 days during a tax year;
ii) Residential address is located in the United Kingdom, effective for a minimum of 91 days, out of which 30 have been spent on UK territory.
Consequently, according to the aforementioned rules, a physical person may meet the requirements of both jurisdictions and can be eligible to be a tax resident of both countries. Therefore, the DTT includes a non exhaustive list of terms which help identify such individuals’ exclusive tax residency as follows:
i) Ownership of a permanent immovable property in one of the countries, parties to the Agreement. In the event that the individual possesses immovable properties in both countries, tax residency shall be applied on the territory of where the physical persons presents stronger personal and economic ties.
ii) Habitual residency with regards to the amount of time spent in one given country; In the event that the individual in question spends long periods of time in both countries or on the contrary, does not spend much time in either country, then the citizenship rule shall apply.
iii) In the event that none of the aforementioned terms is applicable to a physical person, the two countries, parties to the Agreement, must mutually agree on the determination of the tax residency of the individual in question.
Nevertheless, there are exeptions to the aforementioned and prior to listing them, it is necessary to keep in mind that sometimes there is an obligation to pay tax in a different country to the one one is a tax resident of. In order to understand this, it is necessary to distinguish two terms which are very popular in tax law: the “State of Residency” and the “State of Source”. The first one refers to the country where the person is a tax resident, while the latter to the country where the source of wealth is produced. The most typical example is the tax generated from an income deriving from a real estate property, as immovable property is always taxable at the State of Source due to the principle of the territoriality. Therefore, any income deriving from the rent or the sale of such object shall be taxed at the territory where the property is located. Then, the physical person who receives such income must claim tax relief in their State of Residency, in order to avoid double taxation.
Another example are the pensions; if the pension is public, meaning it refers to civil servant pension, it shall be taxable in the State of Source, as it derives from a public institution and must be paid to the country where the individual had served. However, private pensions shall be taxed at the State of Residency of the pensioner
The present article is for informational purposes only and does not, under any circumstances, constitute legal advice. For further information on the subject, please contact our firm and one of our attorneys shall be glad to assist you.
N. Kalifatidou
Advocate - Legal Consultant
Partner
T.K & Partners
