The complexity of taxation for those working outside national borders is a scenario where multiple factors are intertwined. From the country of origin to the place of work, double taxation agreements and the length of stay abroad, each variable influences the way in which income is taxed. Should workers be taxed in the country where they work, or does residence in Spain require them to comply with their tax obligations in their homeland?
A Spanish professional working abroad should, in principle, be taxed in Spain, regardless of where he/she has generated his/her income, as long as he/she maintains his/her habitual residence in Spain.
According to the Spanish Tax Agency, an individual is considered to be habitually resident in Spain in a number of circumstances, including:
- Staying in Spain for more than 183 days during the calendar year. This calculation includes sporadic absences, unless proof of tax residence in another country is provided. In the case of tax havens, proof of residence for 183 days in the calendar year may be required.
- Establishment in Spain of the main nucleus or base of their activities or economic interests, directly or indirectly.
However, in other cases and with certification of residence in another country, the obligation to pay tax is in that country, not in Spain.
Avoiding duplicities: Bilateral agreements
In situations where a worker is resident in two different countries during the year, mechanisms are used to avoid the dreaded double taxation. This situation arises when the same taxable event is taxed in two countries simultaneously.
In order to prevent double taxation, many countries have double taxation agreements that set out the rules for determining in which country the employee should be taxed. If these rules do not clarify the situation, the employee can consult the tax authorities of the countries involved.
The deduction becomes a common tool in these cases. A Spanish worker abroad can deduct the lower amount between the tax paid in the country of destination and the tax that would have been paid in Spain.
7p exemption: Tax relief for residents abroad
Point 7p of the Personal Income Tax Act (LIRPF) provides exemptions for Spanish residents working abroad. This exemption allows up to 60,100 euros per year to be deducted from income for work carried out outside Spain.
To qualify for this exemption, certain requirements must be met:
- The work must be carried out for a non-resident company in Spain or for a permanent establishment abroad.
- The taxpayer must be considered a tax resident in Spain.
- The services rendered must be physically carried out abroad.
- The place of work must be taxed in a manner similar to Spanish personal income tax and not be a tax haven.
The exemption applies only to income earned during the days spent abroad, up to a limit of 60,100 euros per year. It is up to the taxpayer to choose between the application of this exemption and the regime of excesses excluded from taxation.
The IRNR in Spain: Understanding non-resident income tax
The Non-Resident Income Tax (IRNR) in Spain is a direct tax on income obtained in Spanish territory by non-resident individuals and entities.
According to the Tax Agency, an income is considered to have been obtained in Spanish territory on the basis of territoriality and payment criteria. However, since 1 January 2003, the payment criterion applies only to specific income expressly established by the current regulations.