Travel restrictions and prohibitions and quarantine requirements due to COVID-19 may have effects on your residency status.
If you found yourself in Spain or another country for longer than expected because you were unable to travel, you may face conflicts of tax residence. In this article, we look at the rules for tax residency, possible effects on it derived from COVID-19 and how the Spanish tax authorities regard the matter.
How is tax residence determined?
Your tax residence determines the country in which you must pay tax, generally for the income obtained worldwide. There are some exceptions to this general rule of world income taxation:
- Countries that base taxation on the principle of territoriality and therefore only tax income earned in the country itself.
- Countries that use nationality as a criterion, meaning that they tax their nationals regardless of where they live.
How long do you have to live somewhere to be tax resident?
For the purposes of determining tax residence, many countries take into account the permanence in their territory for a minimum number of days in a certain period of time.
How long is the minimum stay in Spain?
The Spanish tax authorities (AEAT) regard you as tax resident in Spain if you stay in the country for more than 183 days in a calendar year. Sporadic absences are included within the 183 days unless you can prove your tax residence in another country.
Do travel limitations due to COVID-19 affect the counting of days?
The current COVID-19 travel restrictions and prohibitions – many people were/are unable to return to the country where they are tax resident – present a fundamental question regarding tax residency.
Should the period of time forcibly spent by someone (because they were not permitted to travel) in a country where they are not tax resident be considered a force majeure?
Or, on the contrary, should the days be counted as part of the tax residency requirements and the taxpayer accept the consequences of staying in a country regardless of the reason?
What does the OECD say?
The OECD considers that a stay in a country due to force majeure (such as COVID-19) should not be taken into account for tax residency purposes.
The OECD has recommended that member countries and competent authorities take measures to prevent conflicts of residence arising from Covid-19. However, for the moment, with few exceptions, this recommendation has received little response.
What do the Spanish tax authorities say about force majeure?
In Spain, the AEAT tax authorities generally maintain the opposite of the OECD stance and that the number of days spent in a country because of force majeure should be taken into account.
To date, they have not adopted any measures regarding tax residency and COVID-19.
Precedence (see below) appears to indicate that stays due to force majeure are not excluded for the purpose of calculating the number of days of stay in Spanish territory for tax residency (over 183 days in a calendar year).
What stance have other countries adopted regarding tax residency and COVID-19?
Ireland and the UK have published guidelines to prevent possible conflict in the determination of residence as a result of enforced stays in a country because of the pandemic.
Australia has established that in no circumstances will a person forced to stay in its territory because of Covid-19 be considered a tax resident.
Are there any precedents that may affect future decisions by the Spanish tax authorities?
We can draw on precedent from one case of enforced stay in Spain that affected tax residency. The case involved a non-tax resident in Spain who when on holiday in Spanish territory suffered a serious medical problem (a cause of force majeure comparable to COVD-19 travel restrictions and quarantine measures).
As a result, he was admitted to hospital where he spent a long period of time and stayed for more than 183 days in Spanish territory in 2012. The tax authorities, therefore, ruled that he fulfilled the requirements to be considered tax resident in Spain.
In this particular case, there was no double taxation agreement between Spain and the claimant’s country of tax residence.
What if there is a double taxation agreement?
The precedent made the distinction between countries with double taxations agreements with Spain and those with none. For tax residents in countries with no double tax agreement with Spain, the AEAT considers you as tax resident in Spain if you spend more than 183 days in the country even if this is a force majeure (ie against your will).
If, however, your country of tax residence and Spain do have a double taxation agreement in place, the rules determining tax residence in case of conflict between two states are applied.
These determine which country you are tax resident in and generally conclude that anyone who has to spend a certain number of days in a country because of force majeure (e.g. COVID-19) does not become tax resident in that country.
However, a case-by-case analysis is always necessary to determine the exact answer.
Help is at hand
If you have been forced to stay in Spain for a prolonged period of time due to COVID-19 and find that the Spanish tax authorities are contesting your tax residency status, contact us now.
At Costaluz Lawyers, we believe there are grounds for challenging the decision even if there is no double taxation agreement in place between Spain and the country where you are officially tax resident.
Get in touch to find out how we can help you.