Imagine you’ve been living and working in Spain for two years, but you still have your home, your family and part of your income in your home country.
The Spanish tax authorities consider you to be a tax resident. So do the tax authorities in your own country. Both countries want you to pay tax there on all your income.
This situation, which is more common than it seems, is known as dual tax residence, and there is a solution, but it requires swift action and the correct documentation.
How does dual tax residence arise?
Each country applies its own internal criteria to determine who is a tax resident. Spain considers you to be a resident if you spend more than 183 days on Spanish territory, if your centre of economic interests is here, or if your family normally resides in Spain. Other countries have similar or different rules.
The problem arises when two jurisdictions apply their criteria simultaneously, and both conclude that you are a tax resident in their respective countries. This frequently affects posted workers, executives who move between countries, pensioners who spend periods in two countries, and digital nomads with economic ties in several countries. The direct consequence is that both countries may require you to pay tax on your worldwide income, which could mean paying tax twice on the same income.
What happens if I do nothing?
Failing to take action in the event of dual tax residence is one of the most costly mistakes an international taxpayer can make. If two countries consider you to be a resident and the conflict is not resolved, you may face additional tax assessments from the tax authorities for undeclared income, surcharges and interest on arrears, penalties for incorrect tax returns and, in serious cases, tax audit proceedings.
The tax authorities cross-check data with the tax authorities of other countries through automatic information exchange mechanisms such as the CRS or FATCA. Relying on the fact that nobody will detect it is not a viable strategy.
The solution: double taxation agreements
Spain has signed double taxation agreements (DTAs) with more than 90 countries, including all EU Member States, the United Kingdom, the United States, Canada, Mexico, Argentina and Colombia. These agreements take precedence over the domestic legislation of each country and establish a specific mechanism for resolving conflicts of residence: the so-called ‘tie-breaker rule’.
Where two signatory states claim jurisdiction over the same person, the dispute is resolved in accordance with the following order of criteria:
- Permanent residence: a resident who has a permanent home at their disposal. If they have one in both countries, the assessment moves on to the next criterion.
- Centre of vital interests: the country with which it maintains the closest personal and economic ties.
- Usual place of residence: the country where you normally live, regardless of where your home is.
- Nationality: If none of the above criteria is decisive, the country of which the person is a national is taken as the basis.
- Agreement between the authorities: if the dispute persists, the authorities of both states will resolve it bilaterally.
The agreement is applied sequentially: if the first criterion resolves the dispute, the next one is not considered.
What if my country doesn’t have an agreement with Spain?
If your country of origin does not have a double taxation agreement with Spain, each country will apply its own domestic legislation independently. However, Spanish personal income tax legislation includes a deduction for international double taxation, which allows you to deduct from your Spanish tax liability any tax already paid abroad on the same income, subject to certain limits. It is a partial solution but, in many cases, sufficient to significantly reduce the impact.
How to prove your tax residence to the tax authorities
To invoke a double taxation agreement, you need a certificate of tax residence issued by the tax authorities of the other country. This document is the official proof accepted by the Spanish tax authorities to recognise that another country has the right to tax you as a resident.
Without that certificate, Spain will apply its own criteria and may consider you a resident even if you have spent fewer than 183 days on Spanish territory, provided the other criteria are met. In addition to the certificate, the tax authorities may request further documentation during a tax inspection: tenancy agreements, bank statements, utility bills or flight records.
Groups at greater risk of conflict
- Workers who have moved to Spain but still have families and property in their country of origin.
- Managers on international assignments who spend time in several countries during the same financial year.
- Foreign pensioners who spend half the year in Spain and the other half abroad.
- Digital nomads with clients, bank accounts or businesses in different countries.
- People who have recently changed their place of residence and have not correctly notified either of the two authorities of the change.
What to do if you find yourself in this situation
If you think you may be in a situation where you have dual tax residence, the first thing to do is not to wait for a notice from the tax authorities. Taking proactive action is always less costly than responding to an audit.
The standard procedure involves carrying out a tax residency assessment to analyse your specific circumstances, determining in which country you are required to pay tax as a resident under the applicable tax treaty, obtaining a certificate of residency from the relevant country and, where necessary, rectifying previous tax returns.
At GR International Advisors, we regularly deal with cases of dual tax residence, both in Spain and in collaboration with advisers in other countries. If you receive a notice from the tax authorities or have any queries about your situation, please contact us before replying.
Conclusion
Dual tax residence has real financial implications and deadlines that should not be missed. Double taxation agreements provide a clear mechanism for resolving these conflicts where a treaty exists between the countries concerned. The key is to know which criteria apply in your case, to have your paperwork in order, and not to let the tax authorities take the initiative.