Will you get caught not declaring Spanish tax?

Cautionary tales: Getting caught by Spain's tax office

Worth the risk?

Hiding income from the taxman is a national pastime in Spain (although from what I read Greece and Italy are worse).  Many foreign residents and non-residents with Spanish interests prefer to play by the book and declare everything they should.  My Spanish colleagues are sometimes amazed at the honesty of foreigners who declare income which the Spanish tax office would never be able to find on their own. 

But every foreigner who wants to do things right and avoid potential fines and penalties down the road, there is another who is confident they can operate below the radar and avoid paying a euro, even while living in Spain for decades.  Who is right?  Is it really possible to get away with not paying tax in Spain or will you get found out in the end?  This article looks at some of the most common situations and assesses the risk.

1. Stamp duty

Spain does not actually have stamp duty but it has an equivalent called ITP for resale properties and charges IVA (Spanish VAT) on new build properties.¬† A common way of avoiding tax is to under declare the purchase price.¬† This can be done by inserting a lower price into the sale contract and deeds; often the buyer will pay the official price with a cheque or bank draft and make up the difference in cash.¬† This is illegal of course and although it will save on ‚Äústamp duty‚ÄĚ it may be a bad idea from the point of view of capital gains tax, increasing the buyer‚Äôs long term tax cost.¬† But is it risky?

Risk rating:  7/10 Under-declaring property prices is widespread and in the past the tax authorities have turned a blind eye, but this has changed.  Perhaps because it is regional governments which collect the money (and they are all cash strapped) they have got tough.  Some will look at a reported transaction, apply a formula to determine the market value (in their opinion) and issue a retrospective tax demand.  I have witnessed some of these demands in person and have read about others:  e.g.  instances in Valencia where property buyers have faced some outrageous retrospective tax demands running to thousand for properties that have lost value in the housing crash:

Expats hit hard by property tax probe

2. Property taxes

If you own a Spanish property but are not paying any tax you are probably, unwittingly or not, avoiding two taxes: the local property tax (akin to rates) and the national income tax.  The rates type tax is payable at the local town hall once a year, is based on the value of your property (valor catastral) and is called IBI (or SUMA in some regions).  If you are not paying it you should be and it will definitely catch up with at some point.  If you have not received a demand for the tax this could be because the local town hall has not issued one or more likely because the tax has still to be put in your name.  Either way it will eventually surface to cause you problems particularly when you come to sell : it is routine for the buyers to ask to inspect recent years' IBI bills stamped as paid.  The worst thing about not getting an IBI bill is that you may not know for years - the town hall will not necessarily chase you for payment.  The bills will just keep piling up with interest and penalties waiting for the day of reckoning.  Risk rating: 9/10.

Most foreign property owners do pay their rates if only because the previous owner has a big interest in seeing that the tax is registered in their name upon sale.  Less foreigners pay the income tax due on their Spanish homes: the non resident income tax which is levied on an imputed or theoretical value of the "income" or benefit derived from owning property in Spain.  This tax is described elsewhere on this site (Spanish tax form 210) but the point is does it matter if you don't pay?  I have read about foreigners being chased for this tax but have never witnessed it.  In theory it would be very easy for the Agencia Tributaria (Spanish Tax Office) to trace foreign property owners who don't pay up but there seeem to be lots of people who go for years without paying.  Inevitably though the problem surfaces when the property is sold and the tax office become involved (as they will because of capital gains tax); they routinely ask for copies of previous tax returns and, if these were never made, then they have to be done retrospectively. This can be messy and expensive as there are multiple years' tax to pay, interest and penalties and the cost of getting someone to sort it out.  It can also delay the sale.  Risk rating: 5/10 if you are not planning to sell in the foreseeable future, otherwise 9/10.

3.  Annual Income Tax ("La Renta")

Generally everyone living in Spain for over 6 months in any given calendar years is considered a Spanish tax resident and should submit a tax return for that year.  In the first year you become resident it is absolutely required whatever level of income you have but in subsequent years a declaration can legitimately be avoided if income falls below certain levels (see Spanish Income Tax Rates and Allowances).  There is one further exception: those employees of Spanish companies who have obtained an exception to be taxed as non-residents (see Beckham's Law survives).  But everyone else must declare.  Many foreigners don't but will they get caught?

Apart from people trying to hide Spanish employment or self-employed income (i.e. those the Agencia Tributaria have tracked down by their earnings) I have not seen examples of foreigners caught out failing to declare their annual tax returns.  In theory there are a miriad different ways that the AT could check to see whether a person has been resident and thus are liable to submit a tax return; after all they have access to bank account and utility company information and can ask for information from foreign agencies such as HMRC.  Any landlords who don't declare rental income should be aware that tenants can make a tax deduction for rent paid and so are motivated to declare the rental payments; to do so they have to provide the NIE of the landlord and the Agencia Tributaria crosscheck between tax returns to see the income has been declared.

You hear periodically of campaigns to catch non payers but I haven't had clients come to me saying they have received a tax demand out of the blue.  The risk would obviously be higher if you have declared in previous years but one year fail to do so even though you continue to reside in Spain.  Also if you have a resident bank account and have interest earnings these will have been subject to 18% witholding tax and may lead the authorities to wonder about you.  Risk rating: 4/10

4. Working unregistered

One exception to section 3 - getting caught for not paying income tax - is people who work in the black economy, for example:

- they carry on a trade but work for cash in hand

- their "employer" keeps them off the books

- they run a home business, possibly internet based

- they live and work in Spain but their clients are abroad

All of these activities certainly require the work to be registered, either as an employee or as self-employed both of which entail paying regular income tax on the earnings.  How likely are you to get caught?

Lots of Spanish and foreign residents work illegally in this way and they seem to get away with it but there are some ways in which the tax authorities will catch up with you:

Labour inpections - certain workplaces are more likely to be inspected than others.  I have heard of building sites, bars/restaurants and shops being inspected and anyone working being asked to prove they are registered.  Unless evidence of contracts and social security regustration can be shown, the employer and employee will both be in trouble.

Invoices - if you do issue invoices (or your "employer" issues you one on your behalf) then there is a strong possibility the tax office will catch up with you as they often review who is on the other side of invoices claimed as expenses by those who are registered.

Advertising/websites - most businesses require publicity or some kind of sales outlet to win custom which will leave the exposed to investigation by the authorities.

Bank accounts - as discussed, the tax office have full power to review bank records and can thus be alerted to regular receipts, large receipts and corporate transactions which can trigger an investigation

Autonomo - the most common way I have seen of people being caught not declaring taxes is that they are registered autonomo but fail to do their quarterly or annual tax returns (see Autonomo Tax Burden).  Often this is because their "employer" registers them as self-employed to avoid having to pay employer social security and doesn't explain to them that they have to sort out their own tax and social security.  Sometimes people work autonomo for a period and meet their obligations but then fail to do an annual tax return the following year.  The tax authorities will certainly come for you in this case however short a period you have worked as autonomo.

Working illegally is a risk that is on the rise.  The government has ordered the tax office, the social security department and the labour inspectorate to share databases with this in mind.  However it is hard to see how this will catch people who have not registered anywhere and who do not issues any paperwork.

Risk rating: 6/10 (higher if any traces of commercial activity are created)

In time I will expand this article to look at things like offshore bank accounts.

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