COVID- 19 Lockdown stays in Spain will count towards Tax Residency Status in Spain
As numbers continue to spike in European touristic hotspots such as Spain, fears of a new lockdown or forced quarantine have started to resurface, causing many to make a speedy return back home. This fear being compounded by recent rulings calling into question the tax residency of individuals who had in fact got caught in Spain during the initial lockdown resulting from the pandemic.
According to Spanish law, an individual will be considered tax resident in Spain if, amongst other criteria, they spend more than 183 days in Spain. This criteria is broadly consistent with the tax residency rules in many jurisdictions, although each should be considered on a case by case basis.
The question which has therefore arisen over the last several months internationally is whether, as a result of the COVID-19 pandemic, any forced stays in a particular jurisdiction will count towards the tax residency rules in that jurisdiction. In April 2020, the Organisation for Economic Co-operation and Development (OECD) suggested, in a guideline entitled “Analysis of Tax Treaties and the Impact of the COVID-19 crisis” that tax authorities should look to disregard days spent in that jurisdiction for the purposes of determining residency, as a result of COVID-19, on the grounds of exceptional circumstances in cases where the individual had either been forced to remain in a jurisdiction where they were temporarily spending time for work purposes, or had returned to a previous home jurisdiction, provided that in the latter case, the individual did not have a permanent abode in that jurisdiction thereby making him/her potentially resident under domestic residency rules.
Many jurisdictions, such as the UK published guidance on whether days spent in the UK can be disregarded for the purposes of determining residency due to COVID-19, with the general conclusion being that individuals would not be considered tax residents for extended stays during the pandemic, on the grounds of ‘exceptional circumstances’.
Despite the guidelines issued by the OECD and the general stance taken by other jurisdictions however, in a binding ruling (Decision V1983-20) by the Directorate-General of Tax in Spain, it was determined that days spent in Spain by a Lebanese family locked down in Spain as a result of COVID-19, should be taken into account for determining the tax residency of the members of the family in 2020. This was largely based on the following two facts: (i) there is no Double Tax Treaty signed between Lebanon and Spain; and (2) Lebanon is considered a tax haven for Spanish tax purposes.
Whilst the tax agreement between the United Kingdom and Spain, in relation to Gibraltar, has been signed and is currently going through the parliamentary process in Spain, it has yet to be ratified and Gibraltar remains a tax haven for Spanish tax purposes. It is therefore important for Gibraltar tax residents, who may have spent an additional number of days in Spain due to the COVID-19 travel restrictions, to evaluate their residency position in light of the amount of days spent in Spain during the lockdown in order to ensure that they have not fallen foul of the tax residency rules in Spain. Additional travel going forward, should also be planned carefully.
Alvaro Checa of Spanish law firm Garrigues”. commented that: “The application of Spanish tax residency tests for individuals tax resident in Gibraltar who have a property at each side of the border has been highly contentious in recent years. In practice, when an individual resident in Gibraltar also has a significant presence in Spain, the Spanish tax administration makes use of an anti-tax haven provision which enables it to consider the individual tax resident in Spain also, unless the taxpayer demonstrates actual permanence in Gibraltar for more than 183 days within the calendar year. In this regard, the lockdown period will clearly have an effect, as per the Spanish tax administration position, on the assessment of significant presence in Spain or the proof of permanence in Gibraltar for more than 183 days.”