One of the main criteria applied by the Spanish Individual Income Tax Act, in order to consider that an individual is a tax resident in Spain, would be this individual’s presence in Spain during more than 183 days in a calendar year. In order to calculate such period of presence, “sporadic absences” would be taken into account as days on Spanish soil.
The Spanish Supreme Court, in two rulings dated 28 November 2017, contradicts the wide and controversial interpretation of the term “sporadic absences” favoured by the Spanish Tax Authorities. However, this ruling does not address all the problems that may arise from conflicts of residency.
According to the Spanish Individual Income Tax Act (“IIT“) provisions, in order to be liable to income tax in Spain, individuals must be considered tax residents in the country. The applicable criteria to determine whether an individual resides in Spain are (i) such individual must have been present on Spanish soil during more than 183 days in a calendar year or (ii) the centre of this individual’s business or economic activities must be in Spain. Additionally, legal provisions also establish that an individual will be deemed a tax resident in Spain when his or her spouse and dependent underage children are tax residents in Spain, as a result of applying the criteria mentioned above.
To calculate the length of an individual’s presence in Spain, the law provides that any “sporadic absence” must be counted as presence in Spain, unless the taxpayer can prove tax residency in another State with the corresponding certificate of tax residency.
Thus, to prevent “sporadic absences” from being counted as days of presence in Spain, it is essential to have a certificate of tax residency issued by the tax authorities in another State. However, if this certificate is not issued, Spanish tax authorities favour a broad interpretation of the term “sporadic absences” and have held in certain cases that individuals with an effective presence in Spain of no more than 120 days should still be considered tax residents on the basis that “days outside” should be counted as “sporadic absences”. Such an interpretation may lead to situations where it would be impossible to prevent tax residency for an individual with just a few days of presence in Spain. Given that individuals resident in Spain would be liable to tax on their worldwide income, the different interpretations of this term can give rise to consequences with significant financial implications.
The term “sporadic absences” is not expressly defined in the IIT provisions. This gives rise to controversies when interpreting the application of this term and its reach. The Spanish Supreme Court, in its rulings issued on 28 November 2017 (references 1829/2017 and 1850/2017, Appeals 812/2017 and 815/2017), has addressed the issue of sporadic absences as a measure to determine days of permanence on Spanish soil and, therefore, tax residency.
In its rulings, the Spanish Supreme Court does not provide a universal interpretation of this term. The Supreme Court, however, does lay down that the term “sporadic absences” does not allow for such a wide interpretation as to include absences for periods longer than 183 days, since this would imply “counting in” precisely those circumstances which the legal provisions intended to “leave out” when assessing whether a taxpayer is a resident in Spain. Thus, the Supreme Court considers that the term “sporadic absences” should be applied as a criterion additional to that of permanence. Where it is clear that there is no “permanence” as defined by law, any “sporadic absences” would then be irrelevant, since these absences would have no link to a primary presence from which to derive any meaning.
This precedent, which would seem completely logical, was necessary, in light of the position taken by Spanish Tax Authorities. Thus, in one of the cases on which the Spanish Supreme Court ruled, Spanish Tax Authorities considered that an individual should be treated as a tax in resident in Spain in the year 2011, when such individual left Spanish soil on the 1 October 2010 and did not return until the 30 September 2011. The Spanish Supreme Court has now clarified that this 9-month period may not be considered a “sporadic absence”.
The Supreme Court also considers that the term “sporadic absences” must solely and factually address the length of time spent outside of Spain. In other words, “sporadic absences” may not be linked to an intentional or subjective element. These absences should not be linked to the taxpayer’s intention or willingness to relocate outside of Spain on a temporary basis and to return upon expiry of a pre-established term. The precedent established by the Spanish Supreme Court makes it therefore clear that extensive interpretation of the term “sporadic absences” is not to be allowed.
This criterion is especially relevant in the case of executives, hired by a local group’s subsidiary but with international responsibilities that entail significant travelling, as it can give rise to difficult issues of tax residency. For instance, in the case of a Spanish executive travelling abroad during lengthy periods, the criteria which will apply to qualify this time abroad will be especially significant. It is true that there is an argument to be made whereby tax residency would be maintained so long if the Spanish subsidiary is the formal employer of an executive. However, there is an endless array of possible factual permutations and conflicts of tax residency that can quickly arise. For instance, the salary of this executive could be fully re-invoiced to the group’s headquarters abroad, which would add an additional factor to take into account when assessing the tax residency of this executive.
Similarly, the interpretation of the terms “sporadic absences” and “centre of business or economic interests” should also be taken into account in less common cases where executives from other States recurrently travel to the Spanish headquarters of the group, especially when the salary is also being re-invoiced to Spain. In such cases, obtaining a tax residency certificate from this other State may also be necessary.
The Spanish Supreme Court’s interpretation of “sporadic absences” is therefore logical and curtails some of the Tax Authorities’ excesses. However and despite the unquestionable usefulness of these precedents, these rulings do not provide an answer to all the issues which can give rise to conflicts of residency. It is important to bear in mind that employee relocation and travel, especially where such employees have international responsibilities, can give rise to situations the tax consequences of which may not have been anticipated by employers and can lead to additional costs for both employees and employers.