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 tax treaty between the UK and Spain would mean that your UK rental income is taxable firstly in the UK (the property is located there) and then in Spain, where you claim a tax credit for the UK tax paid.
Do I have to pay tax in Spain on my UK income? ›
As you are resident in Spain, while employed by a UK employer, you will be taxed in Spain on that employment income (to Spain, your UK employment income is foreing income).
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.
Do I pay tax on my UK savings in Spain? ›
Tax Free Savings in Spain
Peps are now called ISAs and the allowance is now £20,000 per annum. If you live in Spain and have an ISA please note it is taxable in Spain. The fact that it is tax free in the UK does not transfer to Spain and you should look at the alternative below.
How can I avoid double taxation? ›
When a business is organized as a pass-through entity, profits flow directly to the owner or owners. In turn, these are not taxed at the corporate level and again at the personal level. Instead, the owners will pay taxes at their personal rate, but double taxation is avoided.
What is the benefit of the UK tax treaty? ›
The treaty provides relief from this double taxation by allowing individuals to claim a credit for taxes paid in the other country. Secondly, the treaty provides for reduced withholding tax rates on certain types of income such as dividends, interest, and royalties.
Is Spain scrapping the 90 Day rule? ›
Spain is pushing the European Union to scrap it. Spain is pushing the European Union to scrap the 90 day rule which means that non-resident Britons can only spend 180 days in the country in two blocks of two. The ruling has hit British holiday home owners hard and is said to be costing the Spanish government millions.
How much money do you need in the bank to get residency in Spain? ›
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.
What are the entry requirements from the UK to Spain? ›
Passports & Visas
British citizens don't need a visa to enter Spain but must have a valid passport. For the most up-to-date passport and visa info, visit www.gov.uk/foreign-travel-advice/spain/entry-requirements.
The double tax treaties signed by Spain will prescribe compulsory provisions regarding the taxation of business profits obtained by a foreign company when operating here. As a general rule, the profits of a foreign company are to be taxed in the country where the business is registered as a tax resident.
What is the UK Spain agreement? ›
The agreement sets out the shared ambition of the UK and Spain to explore new initiatives in the field of education cooperation, including areas related to dual degree systems, the teaching of our respective languages and face-to-face, online and/or hybrid training.
What is the Beckham law in Spain? ›
For starters, the Beckham Law allows foreigners to pay taxes on Spanish-sourced income at a flat rate of 24%. Compare that to the typical progressive tax rates of up to 47%, and it can mean a major difference in your tax bill. Even better, most worldwide income is excluded from Spanish taxation.
Can I be resident in Spain but 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.
Can I have a UK savings account if I live in Spain? ›
Some UK banks, such as HSBC and Barclays, will allow you to open a UK bank account even if you're still living overseas. This can be useful if you want to get it all sorted before your moving date. Opening an account takes around 10-15 days, but again this varies between banks.
Does Spain tax US pensions? ›
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.
Can you claim tax back in Spain from the UK? ›
All visitors whose main residence is outside the EU can claim a tax refund on occasional purchases made in Spain of items for personal use or as gifts which they wish to take back to their country (with the exception of purchases made in the Canary Islands, Ceuta and Melilla).
Do I have to pay import tax from UK to Spain? ›
Taxes and duties must be paid to import goods into Spain from outside the European Union, whether you are an individual or a commercial entity. The import duties and taxes payable are calculated on the value of the imported goods, plus the cost of importing them (transport and insurance).
What are the benefits of the US Spain tax treaty? ›
One main benefit of the United States (US) and Spain tax treaty is the relief from double taxation. This is a significant step in helping Americans not to be overtaxed in Spain. The double taxation relief allows Americans to claim a credit for taxes paid in Spain to avoid being taxed in Spain and by the IRS.
