Working from home is the new normal and combined with a notable reluctance to return to the conventional office, there is no doubt the nature of work has changed dramatically. Some brave souls took the opportunity to transform themselves into digital nomads, or perhaps more prudently they moved to a sunny spot in Spain with a decent internet connection. Remote workers now count for a sizeable number of employees, with the inevitable tax implications. In February 2021, the Spanish General Directorate of Taxes (DGT – not to be confused with the Spanish Tax Office known colloquially as Hacienda) published its official response to this shift in working conditions. But what does it mean for the expat living in Ibiza juggling their laptop and a café con leche and pan con tomate? Let us break it down for you.
The DGT decision came after deliberating on an individual case of a person offered a job by a British company who permitted remote work in Spain as long as the employee spent more than 91 days per year in the UK. The question was where was this person to pay taxes and if it was in Spain then how could double taxation be avoided?
First, let’s investigate the difference between being a resident and a tax resident. You are considered to be a tax resident in Spain if you spend more than 183 days here per year. This means you must pay taxes in Spain on the income you earn worldwide. For example, if you earn an income from a UK-based company, you will pay taxes on that income in Spain unless you spend at least 182 days outside of Spain every year. If you are a non-resident or a non-resident for tax purposes based in Spain, you pay tax only on the income earned in Spain but you are not permitted any deductions and will be charged a rather hefty flat rate. You might think you can simply register as a non-tax resident and avoid it all, but this is a dangerous game to play, with an increasing number of random audits and heavy penalties for flouting the law.
Nobody wants to pay double tax and thankfully Spain has a double-tax treaty with 90 countries meaning that from Australia to Vietnam, most teleworkers will be covered by this arrangement. Take note though, if your business has a physical establishment in Spain then it will be required to pay local tax in the municipality in which the premises are located. Businesses with teleworkers residing in Spain but without physical premises are exempt from paying local taxes.
Beware, however, because if the business does not have a permanent premise in Spain but makes use of a place of business to which it is not legally connected, local tax could be applied. So, that office you pay rent on to use the internet and a desk might be enough to take you over the tax line. Be careful too if your position enables you to contract employees in the name of the non-resident company as this could be construed as having permanent premises. In short, there may be tax implications even if your company does not set up a legally binding office space.
The DGT case referred to a UK teleworker employed by a British company, but the precedent will apply to any person who works remotely in Spain for a company established overseas if that person spends more than 183 days here. An overseas worker classed as a tax resident in Spain is liable for Spanish income tax AND tax on all their worldwide income. The very important modelo 720 form is an essential piece of tax kit for any foreign worker and neglecting to submit it may incur severe fines and an enormous headache. Even genuine mistakes are unlikely to sway the heavy hand of Hacienda.
In August 2021, it was announced that a new visa targeted at start-ups and digital nomads will be introduced. As with any initiative of this sort, there are caveats and the fine details are yet to be revealed. The plan is called the Red Nacional de Pueblos Acogedores para el Teletrabajo (National Network of Welcoming Villages for Remote Workers). If the name didn’t give it away, the idea is to encourage people to visit and work from the many villages across Spain with dwindling populations. Visa holders can choose from numerous villages with a population of 5,000 or less and are provided with a host to show them the ropes. The visa is valid for 12 months and is a great way to experience Spain, however it does not cover Ibiza, and it’s assumed the tax implications remain the same.
Some countries have created a simplified tax system where individuals with straightforward incomes can fill out and submit their tax returns. Not so here in Spain where the system is as tricky as a tangled ball of yarn. As with any kind of official paperwork in Spain contracting the services of a trusted ‘gestoria’ (tax agent) is essential. Do not attempt this at home folks… Leave this one to the professionals!
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