Hacienda takes advantage of lockdown to collect taxes
The Spanish Tax Agency (Hacienda) is taking advantage of foreigners being stuck in Spain and collecting taxes that they may otherwise have avoided paying. They are maintaining the 183-day limit, where any foreigner that remains in Spain for more than 183 days is considered a tax resident. Yet, government restrictions are preventing them from returning to their other countries’ of residence. The Organisation for Economic Co-operation and Development (OECD) has called on countries to stop these measures by “force majeure”.
The mobility restrictions decreed by the Government have caused many with tax residence outside of Spain to be stuck here. Thus, many will end up accumulating more than the 183 days resident in Spain – after adding up the duration of these restrictions and the time they have stayed in Spain before and after them. Contrary to the recommendations of the OECD, the tax agency is pursuing taxes from these residents.
The situation has caused great concern for many foreigners who have been forced into lockdown in Spain. Some have managed to leave the country by unusual means: “a few days ago, a desperate client faced a long, complicated journey back home, with several boat trips just to avoid being considered a tax resident here”, points out Alejandro del Campo, a partner of DMS Consulting in Mallorca, with a large portfolio of foreign clients. “In the face of the imminent death of a family member, he may even have to answer for Inheritance.”
If one stays in Spain for 183 days, Article 9 of the Personal Income Tax Act (IRPF) comes into immediate effect. Foreigners become Spanish taxpayers and the Tax Agency will require them to pay, among other taxes, the IRPF on all their worldwide income.
The Inland Revenue would require that any income received worldwide be taxed as well as any inheritance they receive in any country. In addition, for those outside of Madrid, the Treasury would also tax a resident’s worldwide wealth. Such a tax does not exist in most other countries.
Of course with the current pandemic, there is the possibility of sudden deaths in families. If such an event surprises a Spanish tax resident, they would be obliged to pay Inheritance and Gift Tax for any money received anywhere in the world. In addition, a new article of the Income Tax Law would apply, which requires that Model 720 of the Treasury is filed to declare information on all goods that a taxpayer has abroad if their value exceeds 50,000 Euros.
These tax limits also apply on a national level between the different Autonomous Communities, such as with the Personal Income Tax (IRPF) and Wealth Tax (IP). With regards to the wealth tax, this can vary widely between regions, since some tax it at more than 3% while in Madrid it is 100% subsidised.
The OECD urges tax administrations to follow the practices of other member countries, such as Australia, the United Kingdom or Ireland, who are not including days in lockdown as part of the 183-day threshold.
Esaú Alarcón, a partner of Gibernau Asesores, maintains that such taxes could be litigated. In his opinion, the undefined legal concept of “sporadic absences” could be understood to include the period of confinement in Spain or in an autonomous community other than that of the person’s habitual residence. “However, the burden of proof lies with the taxpayer and he should do his best to return home as soon as possible after the end of the period of confinement in order to demonstrate his intention,” recommends Alarcón.