In March 2021, governments and parliaments in Spain and the UK took steps to formally approve the International Agreement on taxation in a bid to protect the financial interests of the UK and Spain regarding Gibraltar in what has been referred to as the Tax Treaty.
The Tax Treaty came into force on 4th March 2021, having been signed two years prior in 2019, with the goal of resolving disputes and improving cooperation between Spain and Gibraltar where tax residency is concerned. But while the treaty came into effect on this date, there are taxable periods which come into force later on in July of this year for Gibraltar and in January 2022 for Spain.
Why is the Tax Treaty significant?
The Tax Treaty is the first between Spain and the UK, regarding Gibraltar explicitly, which has been drawn up in over 300 years and fully respects the 2006 Gibraltar Constitution. The treaty was designed to take the interests of all parties into account and demonstrates the commitment of the UK, Gibraltar and Spain in supporting cooperation.
In a joint ministerial statement between Foreign Secretary Dominic Raab and the Chief Minister of Gibraltar, Fabian Picardo, Raab stated that the unique situation of Gibraltar offered an opportunity for negotiation, but at the core of the aim was to secure the future prosperity of Gibraltar and the surrounding area. The Tax Treaty will provide people in Gibraltar greater stability and legal certainty that wasn’t there previously.
How does the Tax Treaty apply to individuals?
As Hassans’ Partners Grahame Jackson and Kenneth Bonavia explain, the Tax Treaty applies anywhere where it is deemed that there is dual residence. For Spain and Gibraltar alike, residency is determined by the normal local laws for each respective location. Under the current rules, which continue to apply, where someone is claiming to be resident in a tax haven country, tax authorities might require you to prove your residency status.
Where an individual’s residency is conflicted, the Agreement is designed to provide rules and criteria to resolve the conflict, which weigh in Spain’s favour. The individual is deemed a resident of Spain if any of the following conditions apply within a calendar year:
- If the person in question spends more than 183 overnight stays in Spain. Periods of ‘sporadic absence’, where the individual is in neither territory, will be added to the total time spent in whichever territory they spend the majority of their overnight stays.
- If the person’s spouse or similar relative, parents or dependent children, or any other descendants, are residents in Spain.
- If the person’s permanent residence is in Spain.
- If two-thirds of the net assets the individual owns, whether directly or indirectly, are situated in Spain.
How does the Tax Treaty apply to companies?
For issues of tax residency for companies established or managed in Gibraltar, under Gibraltarian law, where there’s a significant relationship with Spain, it will be deemed that they are Spanish tax residents if any of the following apply:
- If the majority of directly or indirectly owned assets are situated in Spain.
- If the majority of its income in the calendar year originates in Spain.
- If the majority of its executives or managers are Spanish tax residents.
- If the majority of its capital, assets, voting rights or beneficial owners are, whether directly or indirectly, controlled by Spanish tax residents.
From 1st January 2022, any Gibraltar company which primarily holds Spanish assets will automatically be considered a Spanish resident under this new Agreement, and there’ll be no mechanism to challenge this.
Under the new guidelines and regulations, Spain hopes to put an end to unfair business practices by forcing companies to pay taxes in Spain if the majority of their assets are located on Spanish territory, or if most of their revenue comes from Spain. While there are a few exceptions to accommodate businesses where activities genuinely do take place outside of Spain, it will be a requirement for such companies to prove that more than 75% of their revenue comes from Gibraltar.
Final thoughts
The success of the Tax Treaty will be dependent on the exchange of information between Gibraltar and Spain. Authorities in Gibraltar will be required to share tax data with Spanish authorities, though many of these will be automatic, such as information regarding cross-border workers and vehicles which are registered on either side of the border.
Mike James is a regular traveller and frequent visitor to Spain having lived in Andalucia, Valencia & Murcia during his time. With first-hand experience of life in Spain, a background in finance and property and an established freelance writer, he provides engaging and well-researched content across a broad range of topics.
FAQs
The UK-Spain treaty is designed to prevent individuals from paying tax twice on the same income. Individuals may have to pay tax in the UK and Spain if they are residents in the UK and have income or gains in Spain or if they are non-residents in the UK and have income or gains in the UK.
How does the UK Spain tax treaty work? ›
The terms of the UK/Spain Double Tax Treaty mean it is only possible to be tax resident in one of the two countries at any given time. The treaty includes rules to help you establish your tax residency.
What is the tax loophole in Spain? ›
Expatriates in Spain can enjoy numerous benefits under the Beckham law, which include: A reduced flat tax rate of 24% on income up to €600,000, compared to the progressive rates up to 43% for residents. Taxation on Spanish-sourced income only, rather than worldwide income, which can lead to significant tax savings.
Do I have to pay tax in Spain if I pay tax in the UK? ›
Tax. The UK has a double taxation agreement with Spain so that you do not pay tax on the same income in both countries. Ask the relevant tax authority your questions about double taxation relief.
What is the tax treaty with Spain? ›
The US-Spain tax treaty ensures that no American will pay more tax than the higher two countries' tax rates. The treaty also defines where taxes should be paid, which normally depends on where the income arises.
How does double taxation work between UK and Spain? ›
As explained in these notes, the UK/Spain Double Taxation Convention provides for exemption from UK Income Tax on interest and royalties. If you've received interest or royalty payments from which UK tax has been deducted, you may claim repayment of the UK tax.
What is the benefit of the UK tax treaty? ›
The US-UK tax treaty is an essential tool for US citizens living in the UK, offering protection against double taxation, reduced withholding tax rates, and clarity on tax residency.
How much income can I have before paying tax in Spain? ›
Personal tax free allowance
| Age | Tax-Free Personal Allowance |
|---|
| Under 65 years | €5,550 |
| 65-74 years | €6,700 |
| Above 75 years | €8,100 |
Mar 22, 2024
Residents in Spain are generally subject to PIT on their worldwide income, regardless of where it is generated, which is taxed, following statutory reductions, at progressive rates. Non-residents are subject to NRIT only on their Spanish-source income.
What tax can I claim back in Spain? ›
Spain will reimburse between 12.75% and 15.3% of the amount you spend during your trip on products subject to standard VAT rates. The minimum purchase threshold is 0.01 EUR. On this page, by entering the amount you spent, you can find out approximately how much of a VAT refund you can get.
In calculating the proof of income for non-lucrative residency, you must have an annual income of 400% of IPREM in your bank account. The IPREM for 2023 is €600 per month. Therefore, as an individual, you will need to have €2,400 as a regular guaranteed monthly income or a yearly income of €28,800.
Do retired expats pay taxes in Spain? ›
Retirment In Spain: Income Tax
Your retirement pension is considered earned income, and thus, foreign pensioners have to pay Income Tax, as long as they surpass the minimum wage threshold and are therefore required to file their income tax return.
Why are expats leaving Spain? ›
The new residency rules, uncertainty around healthcare, tightening financial situations, and job market difficulties are just a few of the problems they face. These issues have transformed what was once an ideal expat experience into a situation filled with red tape and cultural hurdles.
What countries are double taxed in Spain? ›
The double taxation treaties were signed by Spain with the following partner countries: Albania, Algeria, Andorra, Argentina, Armenia, Barbados, Australia, Austria, Cyprus, Belgium, Bolivia, Bosnia, Brazil, Bulgaria, Canada, Chile, China, Columbia, Costa Rica, Croatia, Cuba, Cyprus, Czech Republic, Dominican Republic, ...
Is there double taxation between US and Spain? ›
The United States and Spain have a totalization agreement in place, which is designed to avoid double taxation of their income with respect to social security taxes. It establishes clear rules about which country's social security system covers the employee.
What is an example of a tax treaty? ›
Harmonization of tax rates
Tax treaties usually specify the same maximum rate of tax that may be imposed on some types of income. As an example, a treaty may provide that interest earned by a nonresident eligible for benefits under the treaty is taxed at no more than five percent (5%).
Can UK citizens claim tax back from Spain? ›
UK residents are now eligible to shop tax free in Spain and can save up to 21% by claiming back the VAT on their purchases. What shopping can I claim tax refunds for? A variety of goods qualify, provided you take them home with you unused in the original packaging.
What is the reciprocal tax agreement between UK and Spain? ›
The double taxation agreement is always reciprocal. So, if your employment income is taxable in Spain, you can claim a refund of tax paid in the UK and vice versa. If both countries have a right to tax the income article 22 applies and a credit for tax paid in the other country can be made.
What is the agreement between the UK and Spain? ›
The agreement will enter into force on 2 August 2023. This agreement enables students with UK qualifications (including A-levels and equivalents) to access universities in Spain without the need for the Spanish general university entrance exam.
How does double taxation work in Spain? ›
If the taxpayer is resident in a country with which Spain has signed a double taxation agreement, the provisions of that agreement will apply since, in some cases, the taxation is lower and, in others, if certain requirements are met, the income is not taxable in Spain.
