Looking for a new, friendly (duh! today, one more criterion is relevant!) a safe place for yourself and your loved ones. Spain keeps popping up in the press, in conversations, in plans. Remember. Spain holds numerous advantages making for its attractiveness. However, you will not find taxes among them. As in any project, it is worth taking some time to be thoroughly prepared.
How do you effectively change your tax residence and pay the tax where you want?
Remember, tax residence is like assembling a jigsaw puzzle. It is a whole set of factual elements that make up a whole picture. Or maybe you’d rather play solitaire. You win when all the cards match.
Once you’ve got all the cards in your hand. It is on this “picture” that a complex network of local and international regulations is imposed, which determine where your residence is.
What does it look like in practice? How should you arrange your Spanish tax residence jigsaw puzzle?
More and more often I encounter a situation when you buy an apartment in Spain where you want to stay, live, send children to school or kindergarten, but your business is still in progress in Poland. Some of you hope that they will still pay taxes in Poland and would not like to obtain a Spanish tax residence. Others are willing to obtain a tax residence in Spain but assume that the business will pay taxes in Poland and only in Poland.
Unfortunately, neither approach is correct. Poland will judge you on the basis of the Polish law, Spain will judge you on the basis of the Spanish law and it may turn out that you are actually a tax resident in both countries. This in turn means that both countries may wish to tax the income you have obtained in other countries as well. In other words, you would have to tax the income from the business in Poland in Spain anyway. And you know that taxes reach up to 50% there!
How to avoid double tax residency?
You can make use of double taxation laws that indicate how to resolve a double tax residence conflict. Most often, you just have to move one piece of the puzzle and the situation is again under control. But which one? If you analyse it carefully, you’ll definitely choose the right one. It’s a much worse situation if life itself moves one of the pieces, for example: you cannot find a president to replace yourself and you have to remain in the governing body of your Polish company; the child will go to school in Spain after all or, the opposite, they will not attend it at all. It doesn’t seem to be so bad. But! Your personal life situation is a series of elements that together form your centre of interests in life. Sometimes, only one piece can outweigh the scale and make it tip in favour of the location that you did not consider as your tax residence. And then you have to glance at other elements that you didn’t even have to think about before. And everything needs to be pieced together again.
Any examples? Here you are! This one will be a better illustration of when Spanish tax residence applies and when it does not.
You arrange your life in such a way that your centre of interests – personal and economic ones – will be, for example, in Spain. If the centre of interests is in Spain and you live there, there is a high probability that you will have a Spanish tax residence, or you will pay taxes on your entire annual income there. Later, however, it turns out that something took a different course, and the centre of life’s interests is still in both countries! Then you need to take into consideration the DURATION of your stay. In order to lose your Polish tax residence, you need to stay a certain amount of time in a given country, which you did not plan before, because your business requires you to constantly travel around the world.
Alternatively, you want to maintain a Polish tax residence and you run a business in Poland. But suddenly it turns out that you have too much in common with Spain. So, you have to make sure that you spend enough time in Poland in order not to lose your Polish tax residence.
Another example. You decided to live abroad, but you haven’t chosen a place yet, because you want to take a look around the world and for now you “became installed” temporarily in country C. You were on the right track to lose your tax residence in Poland, but life created a piece of its own scenario again and your plans flopped. It turns out that you still maintain the Polish residence, even though you are practically not here. You have no choice but to re-examine your situation and rearrange the jigsaw puzzles in Country C in such a way as to strengthen your residence there.
These puzzles have their own logic. You have to hold on to it, and it’ll be fine. The most important thing at the beginning is to capture the rules of jigsaw puzzle logic. There appears a problem if you don’t realize the change. So far, you’ve lived in the same country, and you didn’t have to think about it, so you haven’t. When you go abroad, you have to think about it and prepare for the consequences of living and doing business in the international sphere. That’s what this was all about! Is this what you wanted? And when you get to it properly, it turns out the only necessary thing is to learn the rules, and everything will work in your favour.
Okay then! We’ve managed to take control of the situation. So, where do you finally pay your taxes?
If you have decided to remain a tax resident in Poland, and your family lives in a warm climate and you live with them in and out, you must also remember about the tax rules in this new location. Here, let’s return to Spain, which we have come to fancy so much. The fact that you do business in Poland means, of course, that you pay tax in Poland – that’s what you wanted, because no one can topple the Polish lump sum tax or the Polish IPBox (Intellectual Property Rights reliefs). At present we have practically among the lowest taxes in Europe.
Meanwhile, you live in Spain, enjoy the climate, have a beautiful house… You don’t have a Spanish tax residence. However, are you sure you don’t pay tax there?
If you bought a house in Spain, there are two things you need to remember
- First, the wealth tax that, as a non-resident, you have to pay from Spanish property. While the authorities are unlikely to check the contents of your safe or jewellery box, they know a lot about your apartment from official records. This includes the fact that this is your second home, and therefore does not benefit from property tax exemptions for the real properties which are your primary residence.
- Since it is a “second home”, it means that you do not live in it all the time, so you should either pay the tax on rental income, or… well, just – the tax on hypothetical rent. In Spain, there is a tax on the so-called assigned income from urban real estate. For non-residents from the European Union, it amounts to 19% of the assigned income. This hypothetical income is an officially imposed calculation of an amount based on the cadastral value of the property and the corresponding ratio (1.1% or 2%). This tax is something different from the property tax. So, when you have a house or apartment in Spain, you should expect that you can pay three different taxes: property tax, real estate tax and income tax.
If you run a business in SPAIN, or, to put it differently, you run it in Poland, but from SPAIN you have to take into account the taxation in Spain. Undertaking economic activity in the territory of that country results in taxation. Of course, it would still be necessary to examine whether the activity carried out in Spain creates a tax establishment there or not. If so, the income obtained through such a permanent establishment should be taxed at a rate of 25% in Spain. However, Spain has introduced internal regulations that allow 19% withholding tax to be taxed on income from economic activity also carried out without a permanent establishment. These provisions give way to an international agreement, so care must be taken to protect yourselves from them.
A FEW WORDS TO REMEMBER
Despite these difficulties, you are still thinking about Spain! Good. It is worth taking care of yourself, children’s education and it is worth investing your money, for example: buying a house. Remember that real estate is the main source of sustenance for the Spanish Treasury. And since you are thinking about Spanish real property, it is worth getting well prepared for the move. And if you’ve already done it, it’s worth checking out that you’ve done it just right.