Impact on Individuals of the UK-Spain Tax Treaty over Gibraltar

Individuals with connections to both Spain and Gibraltar need to carefully but quickly consider their tax residency status following the signing of the Treaty with Spain on “Taxation and the Protection of Financial Interests”.

Those who have connections with Spain must act quickly to ease the possible longer- term effects of the Treaty due to them possibly being considered to be Spanish tax resident.

If you are unsure of your current tax status you should act before the Treaty affects you and so, possibly, causes you disadvantage. There is a very small window of opportunity to organise your affairs to avoid possible consequences to you in Spain.

Relevant time

The Treaty will come into force once internal procedures in Gibraltar, the UK and Spain, respectively, have been completed.

Under the terms of the Treaty, tax residency in Spain of non-Spanish individuals is determined:

• for the taxable period starting, or
• if there are no taxable periods, to cover any charge to tax arising,

on or after the Treaty becomes effective. This provision provides a window of opportunity during the current taxable period to organise one’s affairs.

Tax residency

For the avoidance of doubt, the Treaty does not change an individual’s existing tax liability under Spanish Law for previous tax years. In addition, any non-Spanish person who spends one year in Spain or a Gibraltarian who spends  four years in Spain, who move to Gibraltar will not lose tax residency in Spain for the period of that tax year plus four more years. This means they will continue to pay tax in Spain for the year then current and a further 4 years.

Any Spanish nationals who move to Gibraltar after the 4^th March 2020 will indefinitely be considered tax resident in Spain irrespective of that change in residency.

Accordingly, it is important for non-Spanish individuals to take steps immediately to ensure certainty about tax residency before the Treaty provisions come into effect.

Effect of tax residency in Spain

If you are working, earning and paying tax in Gibraltar from employment or self-employment, then currently Spain will give you unilateral tax relief to the amount of any tax paid in Gibraltar, but you are fully taxable throughout that period in Spain under Spanish law on all income and assets worldwide, including Gibraltar.

The Treaty requires elimination of double taxation in accordance with domestic law. Currently Spain credits any person with any tax paid in Gibraltar on earnings from employment or self-employment.

Tax residency conflicts

The position is aggravated because, under the Treaty, whilst residency is determined according to the laws of Spain or Gibraltar, certain Treaty provisions determine residency in the event of “… tax residency conflicts”. These provisions apply in the event of a conflict.

A ‘residency’ conflict is undefined, so it seems that the conflict may be ignited, for example, by Spain deciding on reasonable grounds that any individual is tax resident in Spain.

The Treaty presumption is that he/she is resident in Spain unless he/she proves the contrary: having to prove a negative is best avoided by acting in good time.

Determination of residency in the event of a conflict

An oddity is that the first two provisions to determine where any individual is tax resident if he/she is said to be resident in both Spain and Gibraltar are already provisions of Spanish law (residency for 183 days in Spain by the individual or spouse, with any residency elsewhere that Spain or Gibraltar being added to where one has spent most time).

If there is a conflict, then the ability to determine that someone is tax resident in Spain is widened by two new rules. This would indicate that Spain is able to raise a conflict if it best suits it in order to widen its tax base.

The two new rules are:

• Having a permanent home at one’s disposal in Spain; or
• That two thirds of one’s direct or indirect net assets are in Spain.

If one has assets in Spain or owns a house in Spain, these provisions will need to be carefully considered.

Tax transparency and coordination

The Treaty deals with transparency and cooperation in tax matters, which will be the subject of a separate article. In the interim, the most immediately relevant provisions for individuals are:

• Enhanced cooperation is applied;
• All EU and OECD mutual assistance laws and mechanisms will continue to be applied;
• Mutual administrative assistance will be provided whether an individual is a resident or non-resident of either Spain or Gibraltar;
• Automatic exchange of information by Gibraltar of workers registered in Gibraltar as residents of Spain within four months of every calendar year, the first exchange being backdated to 1^st January 2014 and vice versa for Spain;
• Automatic exchange of information by Gibraltar on vessels, aircraft and motor vehicles every six months on 31^st march and 30^th September, also back dated to 1^st January 2014 and vice versa for Spain.

New era of tax transparency, cooperation and the removal of the Rock from the Spanish blacklist

The signing of the Treaty signals a new era of tax transparency cooperation between Gibraltar and Spain.

This should not be ignored by anyone having connections with Spain. Seek advice now and take steps to ensure certainty over your tax residency and reduce the possibility of it affecting you unfavourably.

This new era is intended to culminate in the removal of Gibraltar from the Spanish blacklist of tax haven jurisdictions.

Triay is the only Gibraltar law firm with two offices in Spain. Our Private Client team is able to provide you with tailored advice on how the Treaty may specifically affect you. If you would like to speak to a member of our Private Client team, please visit:

https://www.triay.com/legal-services/private-client/

The information in this publication is for general information purposes only and does not constitute professional advice, legal or otherwise and does not intend to be comprehensive. Triay Gibraltar and Triay Spain SA do not accept responsibility for any loss that may arise from accessing or relying upon the information contained in this publication.