The latest consultation by the Spanish tax agency regarding a foreign remote worker clarifies this issue.
On February 9, 2021, the Spanish Tax agency published its official response to a request for tax residency of a remote worker from the UK who lived and worked in Spain. This decision is mandatory and establishes the tax status of a foreign employee working remotely from Spain.
According to the ruling in case V0194/2021, a foreign employee working remotely from Spain for a company that is not located in Spain can be considered a tax resident of Spain, and as such is required to pay Spanish tax on his entire total income.
Details of the case
The tax agency was asked to determine the status of an individual who was offered a job by a British company — the company allowed him to work remotely in Spain on the condition that he would spend more than 91 days a year in the UK.
The agency needed to give its opinion on where this person should pay taxes, and, if it is Spain, how double taxation can be avoided.
The response of the Spanish Tax Agency
The Agency noted that in accordance with domestic law, the following criteria determine whether an employee is a resident of Spain for tax purposes:
If the answer to any of the above questions is positive, then an individual working remotely in Spain will be equated to a resident of Spain in terms of taxation.
Double taxation
The Agency also considered the issue of double taxation. The employer was a British company, which meant there was a risk that the employee could be taxed in the UK. After reviewing article 15 of the model agreement on the avoidance of double taxation, the agency concluded that income earned by a remote worker can only be taxed in Spain, even if it was received for work performed for a British company.
When the employee is not a resident of Spain for taxation
If a remote worker does not meet either of the two criteria for tax residency, then Spain will be able to tax only income earned while working in Spain, and not his total income worldwide. Taxation in this case will be carried out in the order of income tax from non-residents.
If the UK also tries to tax income as the country of residence of the employee, then the employee will need to confirm the right not to apply double taxation in the UK.
Remote work and taxation in Spain
Due to the growth of remote work, both employees and companies should closely monitor the actions of the Spanish tax authorities.
If an enterprise has a permanent establishment in Spain, it is obliged to register for the payment of the local Economic Activity Tax (IAE) in the municipality where the enterprise is located.
However, the tax agency confirmed that companies do not need to register for IAE in places where it only has remote workers, but there are no other divisions. This is due to the fact that the company does not have the right to dispose of the remote worker’s housing or access to it.
As for other premises, it is not always possible to determine unequivocally whether a company has a permanent establishment or not. If a company has premises in Spain that it can use, even if there is no legal ownership right to them, this can be classified as a permanent establishment, requiring the company to register in order to pay taxes.
Similarly, if an employee regularly exercises the authority to conclude contracts on behalf of a non-resident company, this may be sufficient to recognize a permanent establishment. Despite the desire of companies to save on the costs of organizing office space for employees, they must understand that this can lead to significant tax consequences.
Result
Although in this case we were talking about an employee from the UK working for a British company, this precedent will also apply to any foreign employee working remotely in Spain for a foreign company, provided that this person spends more than 183 days in Spain.
If a foreign employee is classified as a tax resident of Spain, then he will be required to pay not only Spanish income tax, but also tax on all his income worldwide. In addition, he may have to file a tax return on Form 720, which should be treated very responsibly, given the severity of the penalties for failure to submit this form or for mistakes made.
The Spanish tax system is quite complex, and the authorities are interested in curbing cases of underpayment or tax evasion. Therefore, when working in Spain for an extended period of time, it is recommended to seek qualified tax advice.
Fines can be very large, even if non-payment is an unintentional mistake.
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