Spanish double taxation guide
What is the double tax treaty?
Many countries have a double tax treaty with each other to clarify and simplify the tax situation of companies and individuals that have fiscal dealings in both countries. Specifically they deal with situations where a taxpayer is obliged to pay tax on the same income under the rules of both countries and detail when relief is to be given in these circumstances.
Spain and the UK have had a double tax treaty since 1976. (It has been updated during 2014 with most changes applying from 2015.)
When does it apply to me?
The Spain double tax treaty will be relevant to you as an individual when:
- you become tax resident in both countries at the same time,Â orÂ
- you are tax resident in one country but have income in the other
If you have interests in Spain and the UK and you spend time in both there needs to be a way of working out where you are tax resident (i.e. in which country you have your primary obligation to pay tax). The problem arises because each country has different rules to determine this and it is quite possible to be deemed resident by both countries at the same time. The treaty says that if there is a conflict the person is tax resident in the country where they have a permanent residence available and, if they have one in both countries, where their "centre of economic interests" lies. It can get a little more complicated than this; there are more details here:Â HMRC guide to double tax treaty rules on Fiscal Domcile
If, using these rules and the national rules on fiscal residency (see here for Spain), you are deemed Spanish tax resident then that is where you declare your taxes. You may have income arising in the UK, however, and there are further provisions in the treaty to work out what happens when a resident of one country has income arising in the other. Essentially:
- Â All income,Â whichever country it arises in,Â is declared where you are fiscally resident
- Â You may still have to pay tax in the other country on the income arising there, for example because tax has been witheld at source, although it should in most cases be possible to apply to have such witholding tax deductions stopped. See also the next section on rent.
- Â If you do pay tax in both countries on the same income then you can make a claim in the country in which you are tax resident for relief. This is a deduction from your tax bill for tax paid in the other country. In Spain this is called a deduction for "doble imposicion" and it cannot exceed the amount of tax due on the income in Spain.
- taxes covered by this ruling include interest, royalties, salary, profits and capital gains
Income from property in Spain / UK
Income from property (i.e. rental income) gets a specific mention in the double tax treaty. Basically it is treated the same as other forms of income, so if you are resident in one country but rent out a property in another then you will probably have to pay tax in both countries but can use the treaty to get relief in your country of residence.
You live in the UK and buy a holiday home in Spain. If you rent it out the HMRC is certainly going to want you to declare the income (and do look out for holiday home renters who don't declare the rent). But you are also liable to Spanish tax even as a non resident of Spain (see this article Taxation of Rental Properties in Spain). You should declare in Spain using modelo 210 (we have a Form 210 tax return service for this purpose) and in the UK but in the UK you can deduct the tax paid in Spain. You will only end up with an additional tax bill if the UK-calculated tax exceeds the tax paid in Spain.
Pension income from the UK
Generally pension income from the UK is treated the same way under the treaty when you become a tax resident of Spain, so it becomes declarable and taxable in Spain but with a deduction for tax paid in the UK.
If you are living in Spain and have a state pension from the UK this will not suffer tax at source so the treaty is not required. The income is declarable in Spain and there is no deduction for tax paid in the UK because it is received gross of tax.
If you have a private pension then it may well have tax deducted source in the UK. In this case it is still declared gross in Spain (as if no tax had been deducted) but with the benefit that the tax deducted at source in the UK can be deducted from your Spanish tax liability. Once you are Spanish tax resident it should be possible to apply to have your UK income paid gross which stops you having to make double tax claims and has considerable cashflow benefits.
There is one exception to this general way of handling UK pension income once you are Spanish resident and that is government pensions, or Crown Pensions as they are known. The treaty says that pensions paid to civil service employees should be taxed in their home country regardless of where the receiver lives. Up until 2014, they do not have to be declared if the receiver becomes tax resident in another country. (See update below regarding 2015).
The HMRC website defines Crown pensions as:
In general, pensions paid by the United Kingdom Government or a United Kingdom local authority to a resident of an agreement country are taxable in the United Kingdom, but refer to the relevant double taxation agreement to see whether the circumstances of a particular pensioner might entitle him to exemption from United Kingdom tax (see in this connection DT224). Where there is doubt as to whether the payer of the pension is the United Kingdom Government or a local authority, for example where it is paid by a statutory body such as an Area Health Authority, or where it is paid in connection with a trade or business carried on by the Government or local authority, refer to Personal Tax Division (Schedule E), Sapphire House, Solihull.
New UK/Spain Double Taxation Agreement for 2015
A new version of the double tax agreement between Spain and the UK comes into full force on 1 January 2015.
One of the changes closes the loophole whereby persons resident in Spain and receiving a UK government pension may obtain the benefit of personal allowances in both countries.
Spanish taxÂ returns for 2015 will account for UK government pensions (Crown pensions) as using up the Spanish personal tax-free band. The pension income itself will continue to be taxed only in the UK, but other income such as a UK state pension may now be pushed into a higher tax rate band. This isÂ likelyÂ to mean that those receiving this type of pension will pay a little more tax than in previous years.