Spain’s Tax Authorities Get Tough on Residency Requirements

There has been a notable surge in tax residence litigation in Spain over the past few years, marked by a significant uptick in initiatives by the tax authorities. The Spanish tax administration’s interpretation of the residence criteria has resulted in an exponential increase in these cases.

Two conditions stipulated in Spanish tax regulations establish an individual as a Spanish tax resident—either exceeding 183 days in the country during the calendar year or having the center of their economic interests in Spain.

Individuals are also presumed to be Spanish tax residents if their spouse and minor children habitually reside in Spain.

Meeting one of the conditions formed a crucial aspect of the high-profile tax case last year involving the pop star Shakira. In the Nov. 20 agreement between the Spanish prosecutors and Shakira, the Colombian superstar accepted a three-year prison sentence and a fine of 7.3 million euros ($7.9 million). Thanks to her clean record, though, she won’t serve the prison time and the fine was replaced with a payment of approximately 432,000 euros.

The roots of all this trouble can be traced back to the issue of tax residency.

Between 2012 and 2014, Shakira opted not to file any Spanish tax returns for personal income tax and wealth tax, asserting that her tax residency lay in the Bahamas rather than Spain. However, a tax audit concluded with a conflicting view from the Spanish tax authorities, indicating that she was in fact a tax resident in Spain during those three fiscal years.

This revelation triggered the issuance of assessments totaling 14.5 million euros, which were promptly settled by Shakira. As the case created doubts about the commission of a tax offense, the tax authorities escalated the matter by referring the case to the public prosecutor’s office, hinting at potential offenses against the public treasury and initiating a full-fledged criminal procedure.

The legal battle concluded with the disclosure of an agreement with the prosecution, sparing Shakira the looming specter of a possible five-year prison term and a staggering fine that could have soared to approximately 87 million euros.

In acknowledging her Spanish tax residency for the years 2012, 2013, and 2014, Shakira conceded to the claims of the Spanish tax authorities. They based her Spanish tax residency on the permanence criterion, contending that Shakira spent more than 183 days in Spanish territory each year.

Tax Authorities’ Approach

This isn’t an isolated case. Tax control plans prepared annually by the Spanish tax authorities show an increase in procedures related to tax residency. These plans summarize the tax aspects to be checked each year. The focus on tax residency procedures is reflected in the tax control plans for the years 2021, 2022, and 2023.

In terms of the permanence criterion, the tax authorities exploit the concept of “sporadic absences,” enabling them to consider days spent outside Spain as still within the country. Challenging the classification of occasional trips as sporadic absences necessitates providing a certificate of residence in the destination territory to the Spanish tax authorities.

Similarly, when applying the “economic interests” criterion, the Spanish tax authorities may apply this based on the existence of an individual’s wealth in Spain, irrespective of whether it generates income. Any connection with Spain is also leveraged to assert that income was obtained in Spain, even if earned in another state.

Intervention by Courts

The Spanish courts have intervened to temper the zeal of the administration in tax residence matters. A landmark judgment of the Spanish Supreme Court on June 12, 2023 emphasized that when a taxpayer submits a tax residence certificate from another state under the terms of a double tax treaty with Spain, the Spanish tax authorities must adhere to the treaty’s tie-breaker rules to determine the individual’s tax residence.

This legal precedent serves as a shield for taxpayers’ rights and underscores the significance of respecting treaty provisions in determining tax residency.

These legal developments highlight the paramount importance of substantiating evidence for tax residency.

Recommendations for Nonresidents

For Spanish nonresidents spending limited time, or holding assets or earning income, in the country, two significant recommendations apply. First, be aware of both the Spanish tax residency rules and the assertiveness of the Spanish administration’s approach in their application. Second, if possible, obtain a tax residency certificate from another state under a double tax treaty, compelling the Spanish authorities to apply tie-breaker rules.

Tangible evidence of tax residency in another state, particularly through a certificate, emerges as a pivotal 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 García-Jalón is a senior associate, with CMS.

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