Tax residence Spain & UK. Interpretation of the article 4 of the Agreement between Spain and the United Kingdom of Great Britain and Northern Ireland to avoid double taxation and article 9 of the Spanish Income Tax Act (LIRPF).
The expression ‘main core or the basis of his or her activities or economic interests’ used in Article 9.1. b) LIRPF as a criterion for determining tax residence in Spain, must be interpreted in the sense that in order for this criterion to be understood to be met, it is necessary to take into account all the activities and economic interests of the interested party, and therefore, in addition to the place where one’s income is obtained, the location of one’s real estate and movable assets must be considered, as well as the place from which the administration and management of the same is carried out, and any other relevant link to locate the core of his activities and economic interests.
Reiterating the doctrine established in the STS of 12 June 2023, it is declared that in a situation of conflict of residence, it is necessary to resort to the rules provided for its solution in the Double Taxation Convention, requiring for this purpose an autonomous interpretation in relation to the domestic rules that contain similar concepts. Specifically, the ‘tie-breaker’ rule provided for in Article 4.2 of the Double Taxation Agreement signed by the Kingdom of Spain and the United Kingdom of Great Britain, consisting of the determination of the ‘centre of vital interests’, which is broader than, but not opposed to, the concept of ‘core economic interests’ in Article 9.1.b) of the Personal Income Tax Act.
It must be stated in the country where one meets one’s domestic residence and taxation criteria that one is taxed on one’s worldwide income in that country where the Tax Residence Certificate is issued in accordance with the Double Taxation Agreement.
In this case specifically studied, Judgment of the Supreme Court, Third Chamber, Contentious-Administrative, 2nd Section, Judgment 1214/2024 of 8 Jul. 2024, Rec. 1909/2023, which is of interest for appeal, of the three countries in which the appellant apparently had to stay during the year, if he has the weakest ties with any of them (in terms of length of stay, and economic interests – none of which are recorded as being personal – it is the United Kingdom, with the German bank deposit being perhaps larger than the two accounts in the United Kingdom, and the remuneration received from the German club being infinitely higher than that received from the English club.
It was identified by the appellant’s representatives that the following legal norms are being infringed:
(i) Articles 5 and 9.1.b) of Law 35/2006, of 28 November, on Personal Income Tax and partially amending the Corporate Income Tax, Non-Resident Income Tax and Wealth Tax Laws.
(ii) Articles 1 and 4 of the Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Taxes on Income and on Capital and its Protocol, done at London on 21 October 1975 and ratified in Spain on 17 February 1976 [‘DTA’] -this Convention has been repealed, the current Double Taxation Convention of 2013 contains a similar rule-;
(iii) Articles 94 and 96 of the Spanish Constitution.
Therefore, and as explained in the aforementioned important judgment, we have to determine whether or not:
- for the purposes of the Spain-United Kingdom Agreement, it is sufficient to prove residence with the production of a certificate issued in the United Kingdom certifying tax residence in that State, but not certifying that the taxpayer is taxed there on his worldwide income and not only on income obtained in that country.
- If the answer to 1) is affirmative, please specify whether the expression ‘main core or base of his activities or economic interests’ used in Article 9(1)(b) LIRPF as a criterion for determining tax residence in Spain can be interpreted as meaning that for that criterion to be deemed to be met, the fact that the person concerned has most of his real estate or movable assets in Spain takes precedence, even if his income comes to a greater extent from other countries.
- If the answer to (1) is in the negative, clarify whether it is necessary to have recourse to the rules laid down in the Double Taxation Convention, requiring an autonomous and separate interpretation of the domestic rules containing similar concepts and, more specifically, whether the ‘tie-breaker rule’ laid down in Article 4(2) CDI, consisting of the ‘centre of vital interests’, is comparable to the concept of ‘centre of economic interests’ in Article 9(1)(b) LIRPF.
It should be borne in mind that a judicial or administrative body, in order to verify the tax residence of an individual, cannot disregard the content of a tax residence certificate issued by the tax authorities of a country that has signed a Convention with Spain, because that certificate is presumed to be valid; however, that presumption of validity lapses if, given the proven or uncontested facts, it is found that the declaration of that certificate constitutes a breach of the rule in the Convention itself regulating what is to be understood for its purposes by tax residence.
In cases of ‘double residence’ it is necessary to resort to the “tie breaker” rules of the Conventions, which deserve autonomous interpretation; in particular, the criteria of articles 4.2, a) of the IDC and 9.1, b) of the LIRPF do not coincide, the difference being that the notion of ‘centre of vital interests’ of the IDC includes, together with economic relations, the ‘closest personal relations (…)’, while the LIRPF is limited to those (economic relations) and does not take these into account.”.
The most relevant standards for clarity in this report are as follows:
- Law 35/2006, of 28 November, on Personal Income Tax (hereinafter, LIRPF).
‘Article 9. Taxpayers who are habitually resident in Spanish territory
- A taxpayer shall be deemed to be habitually resident in Spanish territory when any of the following circumstances apply:
(a) He/she stays more than 183 days, during the calendar year, in Spanish territory. In order to determine this period of residence in Spanish territory, sporadic absences shall be taken into account, unless the taxpayer proves his tax residence in another country. In the case of countries or territories considered to be tax havens, the tax authorities may require proof of residence there for 183 days in the calendar year.
In order to determine the period of stay referred to in the previous paragraph, temporary stays in Spain as a result of obligations contracted in cultural or humanitarian collaboration agreements, free of charge, with the Spanish Public Administrations shall not be taken into account.
- b) That the main core or base of their activities or economic interests is located in Spain, either directly or indirectly.
It shall be presumed, in the absence of proof to the contrary, that the taxpayer has his or her habitual residence in Spanish territory when, in accordance with the above criteria, the non-legally separated spouse and the minor children dependent on him or her habitually reside in Spain.
- Foreign nationals who have their habitual residence in Spain shall not be considered as taxpayers, by way of reciprocity, when this circumstance is a consequence of any of the cases established in Article 10(1) of this Law and the application of specific rules deriving from international treaties to which Spain is a party is not applicable’.
1) Law 19/1991 of 6 June 1991 on Wealth Tax (hereinafter referred to as LIP).
‘Article 5. One. The following are liable to pay the tax
- a) By personal liability, natural persons who have their habitual residence in Spanish territory, the tax being levied on the totality of their net assets irrespective of the place where the assets are located or the rights may be exercised.
When a resident in Spanish territory becomes resident in another country, they may choose to continue to be taxed on their personal liability in Spain. The option must be exercised by filing a personal tax return in the first year in which they cease to be resident in Spanish territory.
- b) By real obligation, any other individual for the assets and rights of which he is the holder when these are located, may be exercised or must be fulfilled in Spanish territory.
In this case, the tax shall be levied exclusively on such assets or rights of the taxable person, taking into account the provisions of Article 9(4) of this Law.
Two. For the determination of habitual residence, the criteria established in the Personal Income Tax rules shall apply. […]’.
1) Convention between Spain and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Taxes on Income and on Capital, 1975 (hereinafter referred to as the DTC).
” Article 4. Resident:
- For the purposes of this Convention, the term ‘resident of a Contracting State’ means any person who, under the laws of that State, is subject to taxation in that State by reason of their domicile, residence, place of management, place of incorporation or any other criterion of a similar nature, including also that State and its political subdivisions or local authorities. This expression does not, however, include persons who are subject to tax in that State exclusively on income or capital gains derived from sources situated in that State, or on property situated in that State. the expression ‘resident of a Contracting State’ includes pension schemes constituted in that State..
- Where by virtue of the provisions of paragraph 1 a natural person is a resident of both Contracting States, their situation shall be settled in the following manner:
(a) they shall be regarded as a resident exclusively of the State where they have a permanent home at their disposal; if they have a permanent home at their disposal in both States, they shall be regarded as a resident exclusively of the State with which they have the closest personal and economic relations (centre of vital interests);
(b) if the State in which that person has the centre of their vital interests cannot be determined, or if they have no permanent accommodation at their disposal in either State, they shall be considered to be a resident exclusively of the State where they habitually live;
(c) if they habitually live in both States, or if they do not live in either State, they shall be deemed to be a resident exclusively of the State of which they are a national;
- d) if they are national of both States, or are national of neither of them, the competent authorities of the Contracting States shall settle the case by common agreement. (…)”.
Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion in respect of taxes on income and on capital and its Protocol, done at London on 14 March 2013.
‘Article 1. Persons covered.
This Convention applies to persons resident in one or both of the Contracting States’.
Article 4. Resident.
For the purposes of this Convention, the expression ‘resident of a Contracting State’ means, subject to the provisions of paragraphs 2 and 3 of this Article, any person who, under the law of that State, is subject to taxation therein by reason of their domicile, residence, place of management or any other criterion of a similar nature; but the expression does not include a person who is subject to taxation in that Contracting State only in respect of income derived therefrom. The expressions ‘resident of Spain’ and ‘resident of the United Kingdom’ shall accordingly be so construed.
- Where by virtue of the provisions of paragraph 1 a natural person is a resident of both Contracting States, their situation shall be dealt with as follows:
- a) shall be deemed to be a resident only of the State where they have a permanent home at their disposal; if they have a permanent home at their disposal in both States, they shall be deemed to be a resident only of the State with which they have the closest personal and economic relations (centre of vital interests);
- b) if the State in which that person has the centre of their vital interests cannot be determined, or if they do not have a permanent dwelling at their disposal in any of the States, they shall be deemed to be a resident only of the State where they habitually reside;
- c) if they habitually reside in both States, or in neither of them, they shall be deemed to be resident exclusively of the State of which they are national;
- d) if they are national of both States, or are national of neither of them, the competent authorities of the Contracting States shall settle the matter by common agreement”.
- d) Spanish Constitution (EC).
That judgment seeks to determine whether a judicial or administrative body may disregard the content of a tax residence certificate issued by the tax authorities of a country which has signed a Convention with Spain, when that certificate is issued for the purposes of the Convention, and:
- a) seeks to clarify whether, for the purposes of analysing the existence of a conflict of residence between two States, it is possible to reject the content of a residence certificate issued by the tax authorities of the other Contracting State within the meaning of the DTC, or whether the validity of that certificate must be presumed and its content cannot be rejected, precisely because the DTC has been signed.
- b) seeks to determine whether it is possible for a State signatory to a DTA to unilaterally judge the existence of a conflict of residence, disregarding the application of the specific rules laid down in the DTA for such cases. Specifically, whether in the presence of a conflict of residence, it is necessary to resort to the rules provided for its solution in the IDC, requiring for this purpose an autonomous and separate interpretation of the domestic rules that contain similar concepts and, more specifically, whether the ‘tie-breaker rule’ provided for in Article 4.2 IDC, consisting of the ‘centre of vital interests’ is comparable to the concept of ‘core of economic interests’ in Article 9.1.b) LIRPF.
- c) In turn, it seeks to determine whether the expression ‘main core or base of their activities or economic interests’ used in Article 9.1.b) LIRPF as a criterion for determining tax residence in Spain, can be interpreted as meaning that it is sufficient, for that criterion to be understood to be met, that the interested party is the owner of real estate or movable assets in our country, from which no income is derived. Specifically, whether that single circumstance is sufficient, on its own, to render ineffective a certificate of tax residence issued by the tax authorities of a country which has signed a DTA with Spain, when that certificate is issued ‘for the purposes of that DTA […]’.
With regard to a certificate of residence issued in the United Kingdom in accordance with the judgment of the Supreme Court (STS) of 12 June 2023, cit, we can conclude that if the tax residence certificate is issued by the competent authority of the country and expressly states, as required, that it is issued for the purposes of a CD, then it must be considered valid to prove tax residence in the UK, for the purposes of the application of the DTA between Spain and the UK, and this on the basis that the national administrative and judicial bodies are not competent to judge the circumstances in which a certificate of tax residence has been issued by another State, nor can they disregard the content of a certificate of tax residence issued by the tax authorities of a country which has signed a Convention with Spain, when that certificate is extended for the purposes of the Convention, since that would be contrary to the provisions of Article 96 EC and Articles 1(1)(b) and (c) of the EC Treaty. 96 EC and Articles 1(1), 1(2) and 4(1) of the IDC..
However, as also highlighted in the aforementioned STS of 12 June 2023, cit., this does not prevent the reference made by the Convention to the domestic legislation of each Contracting State from leading to a person being considered resident in each of the Contracting States, and therefore the Conventions, in this case the one between Spain and the United States, art. 4.2, establish a series of rules to resolve cases in which a natural person is a resident of both States. In such cases, a conflict arises as to the tax residence of the taxpayer between Spain and the countries that are signatories to the Convention, and therefore reciprocally linked, which makes it necessary to resort to the ‘tie-breaker’ rules provided for in Article 4.2 of the Convention to resolve the conflict.
In short, as the STS of 12 June 2023, cit. explains, the conflict of residence must be resolved by applying the rules laid down in the Convention, which include four successive criteria:
(i) place where one has a permanent home at their disposal;
(ii) (ii) where one has the closest personal and economic relations (centre of vital interests);
(iii) (iii) where one habitually carries on their life and;
(iv) (iv) is a national.
It should also be mentioned that the concept of ‘centre of vital interests’ referred to in the Convention is broader than the concept of ‘main core or the basis of their activities or economic interests’ referred to in Spanish domestic legislation in Article 9.1. b) LIRPF to determine habitual residence in Spanish territory.
As a culmination of all this, the STS of 12 June 2023 established the following doctrine:
- National administrative or judicial bodies are not competent to judge the circumstances in which a tax residence certificate has been issued by another State nor, consequently, can they disregard the content of a tax residence certificate issued by the tax authorities of a country which has signed a Double Taxation Convention with Spain, when this certificate has been issued for the purposes of the Convention.
- For the purposes of analysing the existence of a conflict of residence between two States, the validity of a certificate of residence issued by the tax authorities of the other Contracting State within the meaning of the Double Taxation Convention must be presumed, and its content cannot be rejected, precisely because the said Convention has been signed.
- A State which is a signatory to a Double Taxation Convention cannot unilaterally judge the existence of a residence conflict, disregarding the application of the specific rules subscribed to in the aforementioned Convention for these cases. Thus, in the presence of a residence conflict, it is necessary to resort to the rules provided for its solution in the Double Taxation Convention, requiring for this purpose an autonomous interpretation in relation to the domestic rules that contain similar concepts. Specifically, the ‘tie-breaker’ rule provided for in Article 4.2 of the Convention, consisting of the ‘centre of vital interests’ is broader than the concept of ‘centre of economic interests’ in Article 9.1.b) of the Personal Income Tax Act, and is therefore not comparable […]’.
Therefore, for the purposes of the Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland (the United Kingdom), is the production of a certificate issued in the United Kingdom attesting to tax residence in that State sufficient and sufficient to establish residence, and must it certify that the taxpayer is taxable in that State on his worldwide income and not only on income obtained in that State?
Determination of residence according to Article 9.1 LIRPF.
The Convention does not impose a concept of habitual residence for a person to be considered a ‘resident of a Contracting State’, but leaves it to the domestic law of each Contracting State to determine who is considered a ‘resident’ subject to the taxation of each Contracting State.
Thus, Article 4(1) of the Convention provides that: ‘For the purposes of this Convention, the term “resident of a Contracting State” means, subject to the provisions of paragraphs 2 and 3 of this Article, any person who, under the law of that State, is subject to taxation there by reason of their domicile, residence, place of management or any other criterion of a similar nature’.
It should be noted, although I will insist on this later, that Article 9.1.b) LIRPF differs from Article 4.2 CDI in terms of its content, insofar as the latter refers to the expression ‘centre of vital interests’, which is a broader concept, as I mentioned in the STS of 12 June 2023.
In order to delimit the habitual residence of a taxpayer in Spain on the basis of the ‘main core or the basis of one’s activities or economic interests’, an individualised analysis of each situation must be carried out, as this is an eminently factual question.
The application of the tie-breaker rules:
At this point, the application of the tie-breaker rules of the IDC offers no difficulty whatsoever, on the basis of the proven facts stated in the judgment under appeal, which applies them correctly. Article 4.2. of the IDC provides:
‘Where by virtue of the provisions of paragraph 1 when a natural person is a resident of both Contracting States, their situation shall be settled as follows:
they shall be deemed to be a resident exclusively of the State where they have a permanent home at their disposal; if they have a permanent home at their disposal in both States, they shall be deemed to be a resident exclusively of the State with which they have the closest personal and economic relations (centre of vital interests); […]’.
The interpretative criteria:
From the foregoing it is necessary, first of all, to reiterate the case law doctrine established in the STS of 12 June 2023 (rec. cas. 915/2022), since in the case in question the tax administration of the Kingdom of Spain has not questioned the scope or validity of the certificate of tax residence in the United Kingdom issued by the competent authorities of that State, which does not exclude, given that the circumstances that determine the status of tax resident in Spain also apply to them, as the core of their activities and economic interests are based here, in accordance with Article 9. 1.b) LIRPF, a case of conflict of residence may arise, due to double tax residence, which must be resolved in accordance with the rules of the Double Taxation Convention.
With regard to question 2.2, the expression ‘main core or the basis of their activities or economic interests’ used in Article 9.1. b) LIRPF as a criterion for determining tax residence in Spain, should be interpreted in the sense that for this criterion to be understood to be met, it is necessary to take into account the set of activities and economic interests of the interested party, and therefore, in addition to the place where their income is obtained, the location of their real estate and movable assets, as well as the place from which the administration and management of the same is carried out, and any other relevant link to locate the core of their activities and economic interests, should be taken into account.
Finally, with regard to section 2.3 of the question of appeal, we must reiterate the doctrine established in the STS of 12 June 2023, and declare that in a situation of conflict of residence, it is necessary to resort to the rules provided for its solution in the Double Taxation Convention, requiring for this purpose an autonomous interpretation in relation to the domestic rules that contain similar concepts. Specifically, the ‘tie-breaker’ rule provided for in Article 4.2 of the Double Taxation Agreement signed by the Kingdom of Spain and the United Kingdom of Great Britain, consisting of the determination of the ‘centre of vital interests’, which is broader than, but not opposed to, the concept of ‘core economic interests’ in Article 9.1.b) of the Personal Income Tax Act.
Pedro Heredia Ortiz
Abogado
