UK-Spain double taxation agreement
...and how it might affect you
As you will see, in this blog I’m taking a break from the cost of living in Spain to talk about a subject I promised to pursue in an article about Spanish residency a few weeks ago: the double taxation agreement between the UK and Spain.
In came up in the context of why, if you are a homeowner or have assets in Spain, being a resident is financially more beneficial than being a non-resident. I hinted that this was to do with the tax convention between the two countries and this is what I will discuss today (I apologise in advance for the technical jargon).
2013 Spain-UK Double Taxation Convention
This version of the tax treaty1 between the two nations – the latest in a series of modifications since its inception in 1976 – was drawn up to stipulate where an individual should be taxed on various “items of income, profit or gain”; especially in the event of said individual being a resident in both countries (rather oddly referred to as “Contracting States” in the convention itself) or being a resident in only one country but having income derived from assets in the other.
After all, the theory goes that a person should not have to pay twice on the same income. So, if you are in one of these two categories, the double taxation agreement allows you to offset one tax declaration against the other (through deductions and allowances); meaning you shouldn’t end up overpaying in your “Contracted State”.
I’m a resident in Spain and the UK
Where should I pay my taxes?
Firstly, it’s worth remembering at this stage that you automatically become a fiscal resident in Spain if you reside there for more than 183 days in any twelve-month period. That is to say, even if you haven’t gone to get your Spanish residency permit – something I’d advise doing with Brexit just around the corner – but live here for large parts of the year, you are obliged to do an annual tax declaration.
Our best advice is to comply with this, since the tax man does do periodic checks and you will end up getting fined for so-called "fiscal evasion".
If you are well aware of this legislation but own properties in both countries, you might also be vexed. For individuals who live and work the bulk of the year in one country and use their property in the other country as a second home or to gain rental income, it logically follows that taxes will be payable to the former country’s tax system.
If you’re a resident but don’t work in a “permanent establishment” in either country, do not work at all or cannot provide your means of subsistence – in official terms, your “centre of vital interests” cannot be ascertained – your tax is due in the country where you have your “habitual abode”. If this information is not given, or you don’t have a habitual abode in either state, you must contribute to the country of which you are a national (ie. the state you have a passport for).
Which taxes are included?
The 24-page double taxation agreement document specifies which of the taxes in both countries qualify for relief. In Spain, the following apply (with their equivalent terms in Spanish):
- Income tax on individuals (Impuesto sobre la renta or IRPF)
- Corporation tax (Impuesto sobre Sociedades)
- Income tax for non-residents (Impuesto sobre la renta de no residentes)
- Capital tax (Impuesto sobre el capital)
- Local taxes on income and capital (Impuesto sobre el patrimonio or impuesto sobre plusvalías)
In the UK, income tax, corporation tax and capital gains tax are taken into account.
Living in the UK and owning property in Spain
A practical example
Now that you’re clear on where you ought to pay tax and which ones are included for each country, I’ll give a practical example that may be relevant to several readers.
Let’s say you’re British and live and work in the UK. You travel to the Costa del Sol on holiday and realise that house prices in Spain are very reasonable compared to back home in Buckinghamshire (for instance).
You fall in love with a two-bedroom flat within walking distance of the beach in Mijas Costa that you know will earn you excellent year-round rental income – wait a second, this sounds exactly like VIVA's new promotion, Delta Mar Suites! – and you decide to make the purchase. Good good, I like the cut of your jib.
But you’re not a Spanish resident and will only visit for a couple of weeks a year, so as not to take time away from rental bookings. Do you declare the rental income to HMRC? And, even if you do, will Hacienda (the Spanish tax office) need to know about it? After all, I’m only allowed to get taxed once, right?
The answers to these dilemmas are as follows. In response to the first question, yes. You are a UK national, Britain is your centre of financial interest, your principal abode is there and – most importantly – you’re not even a Spanish resident.
In terms of Hacienda, this rental income falls under tax category 3 above, so you must do a declaration for impuestos sobre la renta de no residentes once per quarter every year. This falls under the remit of a tax regime and accompanying document called modelo 2102 and not doing this declaration is illegal.
Which brings me on to the answer to the last question. By paying what you owe in non-resident tax to the Spanish tax system, you qualify for relief to the tune of the same (or very similar) amount from HMRC. This application of the double taxation agreement ensures you only get taxed once on your income, albeit via a retrospective deduction of your tax contributions paid in Spain.
Which other countries does Spain have a double taxation agreement with?
Fortunately, Spain has signed similar treaties with almost 90 other countries worldwide, meaning that you are more than likely entitled to tax breaks in your own country for a property or income derived from assets on Spanish soil.
For the full list of countries3, follow the link below.
I hope this post has been useful for those who are seriously considering buying a property in Spain. I will touch on UK pensions in more detail in another post, as this will be of interest to many readers, too. If you have any questions or comments, feel free to leave me a message below!