Your children are residents. What about you? Take another look at your tax status

Spanish tax law treats individuals as Spanish-resident where they spend more than 183 days in a calendar year in the country (presence requirement). Sporadic absences (leaving the country on specific occasions) are also counted as days in the country for these purposes. Individuals are also deemed as residents when, even though they spend most of the days in the year outside Spain, they have the core or main base of their economic interests there. Therefore, children going to school in the Balearic Islands are in principle Spanish-resident because they meet the presence requirement in the country.

The law also allows a presumption that an individual is Spanish-resident where their spouse, if they are not legally separated or divorced, and the children under their control are treated as Spanish-resident (under the presence or core of their interests requirements). This legal presumption of residency is refutable which means that the taxpayer can try to demonstrate to the Spanish tax authorities that they are tax-resident in another country. In other words, you are not automatically treated as Spanish-resident because your children go to school in Spain, but you do have to prove your residency for tax purposes in another country. In practice, residency is usually evidenced by producing a tax residency certificate issued by the tax authorities of another country with which Spain has signed a tax treaty in force (Germany, UK, Russia, Sweden, etc.) or has not signed one (Denmark, etc.). Having this certificate is not a guarantee that you will not have tax problems with the Spanish tax authorities. Nevertheless, if a citizen does have one of those certificates, in order to conclude on their tax residency in Spain, the tax authorities will have to embark on a complex procedure which will even involve the other country’s authorities.

If, to the contrary, a citizen whose family resides permanently in Spain cannot evidence their tax residency in another country, when asked to do so by the Spanish tax agency, they could be treated as resident and as a result be taxed on their worldwide income and on all their assets obtained both in Spain and in other countries, in the same way as Spanish citizens resident in the country are.

By way of example, if in 2012 your children under legal age went to school in Spain in the 2011/2012 academic year (from January to June 2012) and the current academic year 2012/2013 (from September to December 2012), the Spanish tax authorities could consider that your children are tax-resident in Spain, and therefore, their parents, if they were inspected, would have to prove to the Spanish taxman that they were not resident, i.e., that they had not spent more than 183 days in Spain and did not have the center of their economic interests here. If they were not able to evidence these circumstances, the Spanish tax authorities could require them to pay taxes on their income and assets as Spanish residents for 2012, an obligation they would have to perform between April 24 and July 1 of this year, 2013.

As you probably know, the Spanish tax agency carries out regular controls at school gates in the Balearic Islands to look for vehicles with foreign number plates driven by parents who are permanent residents and have not registered their vehicles in Spain and paid over the relevant taxes. In view of the country’s national debt, it cannot be ruled out that the Spanish tax authorities might cast their nets further afield than vehicle registrations to bring in the personal income tax and wealth tax of the parents of children attending schools on the islands.

This issue may be a source of even greater concern on remembering that the Spanish government has introduced a new disclosure obligation for Spanish-resident taxpayers. These taxpayers will have to file an informative tax return before April 30, 2013 detailing all of the assets and rights (bank account, investments in entities, life insurance and other financial assets and real estate assets, etc.) they own or for which they are the beneficial owners as of December 31, 2012, and are worth more than 50,000 euros, taking each group of assets separately. If a resident citizen (regardless of their nationality) fails to perform this obligation to file a return and is found out by the tax agency, they may be required to pay personal income tax in an amount of up to 52% of the value of the unreported asset and they would also have to pay a fine for a very serious infringement of up to 150% of that sum (unless they could prove that the asset or right has been acquired with revenues that have been reported for tax purposes in Spain or abroad). Moreover, in all cases, another penalty of at least 5,000 euros would be levied for each unreported asset, subject to a minimum of 10,000 euros, for each group of assets. The combination of both sums (tax and penalties) would mean having to pay to the tax authorities a sum greater than the value of the unreported asset or right. And the measure is even harsher than that, because in practice the debt derived from the assets situated outside Spain does not become time-barred, which means that the tax authorities have an unlimited timeframe for applying the consequences envisaged in the law for a breach of this disclosure obligation. We are not criticizing here whether this new tax legislation is in line with the Spanish Constitution or the Treaty on European Union, although it is very likely that there will be a host of disputes between taxpayers and the Spanish tax authorities in this respect.

This new disclosure obligation, combined with a rise in the exchange of information between the Spanish tax authorities and the tax authorities of other countries (including some “tax havens”) and recent events such as the end of bank secrecy in Switzerland have made it much simpler for the Spanish government to obtain information on the assets and rights that Spanish-resident citizens have in other countries.

Therefore, any foreign citizens domiciled with their families in Spain who have doubts over their tax residency or believe that they cannot evidence residency in another country must review their tax status in Spain sufficiently in advance of April 30, 2013 to avoid having to pay disproportionate amounts of tax on the assets they have abroad.