The assessment of the “Tax Residence” in Spain for natural persons, in accordance with the “centre of economic interests”, should consider both the income flow variable and the financial interests
The Spanish Supreme Court, in the Ruling of June the 12th of 2023 (Case Ref. 915/2022), established that neither administrative nor judicial national bodies can disregard the content of a tax residence certificate issued by the tax authorities of a country that has signed a Double Taxation Convention –herein after “DTC” – (DTC) with Spain, when said certificate has been issued for the purposes of the Convention. Moreover, where the person concerned provides a certificate of tax residence by way of applying a DTC, its validity must be presumed. Thus, in the event of a conflict of residence between the two countries, it will be necessary to resort to the tie-break rules on Article 4.2 of the DTC, which must be subject to autonomous interpretation, especially when referring to the “main centre of interests“, which is a much broader concept than that of “core of economic interests” in Article 9.1b of the Personal Income Tax Law (hereinafter “LIRPF”).
Following the publication of that judgment, two important questions remained, which the Supreme Court finally addressed in the Ruling of 8th of July 2024 (appeal 1909/2023), reiterating that criterion later in the Ruling of 9th of July 2024 (appeal 1913/2023).
The first question needing answered was whether, for the purposes of the application of a DTC, the tax administration can question the tax residence certificate issued by the other State when it does not certify that the taxpayer is taxed on his worldwide income, but only on income obtained in its territory (i.e., as a result of the application of the “remittance basis” system applicable in the United Kingdom to resident, but non-domiciled, people). However, the Supreme Court does not manage to clear up this uncertainty, considering that, although the query may be of interest in the abstract, it is not so for the specific cases’ resolution, since the Administration did not dispute that the appellant (a professional footballer loaned from an English to a Spanish club from July 2013 to July 2014 and from August of that year onwards to a German club) was a tax resident in the United Kingdom for treaty purposes, considering nonetheless, that in 2014 he was also a tax resident in Spain according to the DTC, and therefore invoked the tie-breaker rules of article 4.2 of the IDC.
The second query at stake is the scope of the criterion that establishes tax residence in Spain when the individual has “the main core or base of his activities or economic interests directly or indirectly” in Spanish territory (Article 9.1b of the LIRPF), for the purpose of determining whether a situation of conflict arises in taxation due to double attribution of tax residence. Specifically, whether this expression can be interpreted as meaning that, for this requisite to be deemed fulfilled, the precedent fact to consider is that the person concerned has most of his/her real estate or movable assets in Spain, even if his/her income derives to a larger extent from one or more other countries.
This issue is expressly addressed and answered by The Supreme Court, who states the following in the legal basis of the judgement nº 7:
— The rules for determining habitual residence contained in Articles 9(1)(b) and 72.1.2º of the LIRPF are not comparable. The “main centre of interest” criterion, understood as the territory where most of the taxable base is obtained for personal income tax purposes, has been intentionally established by the legislator for determining habitual residence in relation to the conflict that may exist between the Autonomous Regions for the purposes of regional taxation, something substantially different from the notion of “habitual residence” when it affects the scope of our State’s taxation powers over individuals, whether they are nationals or not.
— The fact that the rules for determining the tax residence of individuals in Spain are contained in the LIRPF, given the relevance of this tax figure, does not mean that the only criterion to be taken into account is the income obtained, since the residence clause examined goes beyond this, taking into account an evidently broader notion, the main nucleus or basis of their economic interests, directly or indirectly.
— The appreciation of a taxpayer’s habitual residence in Spain on the basis of Article 9.1b of the LIRPF is an eminently factual question that requires an individualised analysis that weighs up whether the greatest volume of activities and economic interests are in Spain, in relation to those that could be found in another country. This consideration “does not exclude a taxpayer from being considered resident in Spain despite the fact that the main source of income and revenue is received in another country, if he continues to maintain most of his real estate or movable assets in Spain, as this may be a relevant indication that the taxpayer intends to maintain the core of his economic interests in Spain“.
— The consideration of personal attachments, and even the bigger amount of time (in number of days) spent in Spain than in any other country criteria, does not contravene Article 9.1b of the LIRPF as long as it is used as a simple element of contextualisation to analyse the relevance of the economic relations and activity within Spain, in its turn established on the basis of the studying the economic and financial interests.
Long story short, the Supreme Court has adopted and adhered to an interpretative criterion in line with its previous case law (Rulings of 5th of December 2005 and 4th of July 2006), in which not only the income flow variable but also the financial interests must be weighted, although it does not go into detail as to whether the balancing should be carried out taking as a reference all income and assets existing abroad or in a specific country.
Consequently, it establishes as an interpretative standard that in order for the criterion contained in article 9.1b of the LIRPF to be met “it is necessary to take into account the set of activities and economic interests of the interested party, and therefore, in addition to the place where his income is obtained, the location of his real estate and movable assets must be considered, as well as the place from where the administration and management of the same is carried out, and any other relevant link to locate the core of his activities and economic interests” (Legal Basis nº8).
When navigating the complexities of tax residency and related matters, it is essential to seek personalized advice. We strongly recommend consulting with experienced tax professionals who can thoroughly analyze your unique situation and provide tailored guidance to ensure compliance and optimize your financial interests. Each case is different, and professional insight is invaluable in addressing specific circumstances.
