UK and Spain Tax Treaty and how it affects Gibraltar
By Melo Triay and the Private Client Team, Triay and Triay
Following the recent signing of a Tax Treaty between the United Kingdom and Spain, individuals, companies, trusts, foundations and other legal structures/entities resident in or established and managed in Gibraltar with connections to Spain should consider their potential liability to taxation.
Aside from dealing with issues of tax residency and where tax is payable, the Treaty provides for enhanced administrative cooperation and exchange of information. Beneficially, it provides that persons should not end up paying taxes both in Spain and Gibraltar.
Under the Treaty, tax residency in Spain is determined for the taxable period starting, or if there are no taxable periods, to cover any charge to tax arising, on or after the Treaty takes legal effect. The Treaty will come into force once internal procedures in Spain have been completed.
The Treaty does not change an individual’s existing tax liability under Spanish Law for previous tax years.
A non-Spanish national who spends one year in Spain or a Gibraltarian who spends four years in Spain, who moves to Gibraltar, will not lose their tax residency in Spain
and will continue to pay tax in Spain that tax year and for the following four tax years.
A Spanish national who moves to Gibraltar on or after the 4th March 2019 will pay tax in Spain continuously.
If you are paying tax in Gibraltar from employment or self-employment and are tax resident in Spain, then currently Spain gives unilateral tax relief to the amount of tax paid in Gibraltar, but you are fully taxable in Spain under Spanish law on all income and assets worldwide.
Under the Treaty, whilst residency is determined according to the laws of Spain or Gibraltar, certain provisions determine residency in the event of “… tax residency conflicts”.
A ‘residency’ conflict is not defined, so one may be ignited, for example, by Spain deciding, on reasonable grounds, that someone is Spanish tax resident. Once this happens that person is presumed to be resident in Spain unless he/she proves the contrary.
The two Treaty provisions which determine an individuals tax residency status, where he/she is said to be resident in both Spain and Gibraltar are: first, residency for 183 days in Spain by the individual or spouse, secondly, any time spent away from Spain or Gibraltar is added to where one has spent most time.
If there is a conflict, tax residency in Spain may also be triggered by only having a permanent home at one’s disposal in Spain or where two thirds of one’s direct or indirect net assets are located in Spain.
Companies or trusts
Companies or trusts established and managed in Gibraltar or governed by Gibraltar law will be resident in Spain when:
(a) the majority of its direct or indirect assets are in or are rights that can be exercised in Spain;
(b) the majority of its annual income derives from Spanish sources;
(c) the majority of individuals effectively managing the business are Spanish tax residents; or
(d) the majority interest in capital, equity or profit-sharing rights are directly or indirectly controlled by Spanish tax resident individuals or linked to companies or trusts linked to Spanish tax residents.
Those included in (c) and (d) above are not affected if the Company existed before
16 November 2018 and the following conditions were satisfied as at 31 December 2018:
(e) the Company has a fixed place in Gibraltar from which the whole or part of the business is carried on and an adequate number of qualified employees and operating expenditure; and
(f) the Company pays Corporation Tax in Gibraltar; and
(g) more than 75% of its income for its prior financial year accrues in and derives from Gibraltar; and
(h) in its prior financial year, its income or that of any Gibraltar related party sourced in Spain is less than:
(i) 5% if its annual turnover exceeds €6 million;
(ii) 10% if its annual turnover is between €3 million and €6 million; or
(iii) 15% if its annual turnover does not exceed €3 million.
Any Spanish company or trust whose residency is moved to Gibraltar after the Treaty takes effect will indefinitely be considered tax resident in Spain irrespective of that change of residency.
Companies or trusts that are tax resident in Spain are taxable in Spain under Spanish law on worldwide income and assets. If these are paying tax in Gibraltar, then there are circumstances in which Spain will give unilateral tax relief to the amount of any tax paid in Gibraltar, but these are fully taxable throughout that period in Spain on all income and assets worldwide.
Cooperation and transparency
Succinctly, there is full exchange of information and administrative cooperation in matters related to taxes and enforcement of taxes between Spain and Gibraltar. The Treaty requires “an enhanced administrative cooperation … with a view to exchanging information that is foreseeably relevant to the administration, enforcement and collection …” of all taxes.
All current and future EU provisions engaging mutual administrative assistance on exchange of information and wider cooperation and assisting in the recovery of taxes and duties will have full force and effect beyond Brexit.
The OECD and Council of Europe’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (which is law already in Gibraltar) apply, additionally, any future OECD and G20 standards will be applied.
A liaison body, to be established by Spain and the UK (in the context of the Treaty), is obliged to provide mutual assistance whether a person is resident or non-resident in either Spain or Gibraltar, without qualification under the Treaty.
Co-operation will include automatic or on request exchange, participation in tax examinations, collection and preservation and service or transfer of documents.
There will be automatic exchange of:
♦ annual information, within four months of the end of each calendar year, on workers in each jurisdiction registered as resident in the other, with the first exchange backdated to 1 January 2014 and due within four months of the Treaty entering into force. A worker includes any individual employed and/or carrying on a trade, business, profession or vocation in Gibraltar, who is resident within 80 kms from Gibraltar, and, vice versa, employed or operating within 80 kms of Gibraltar;
♦ Six-monthly information, including ownership, licence plate, value and acquisition date, on 31 March and 30 September, on vessels, aircraft and motor vehicles registered in each jurisdiction relating to residents of the other, with the first exchange backdated to 1 January 2014.
The following will apply as between Gibraltar in favour of Spain:
♦ free access to the Companies Registry and Gibraltar Land Registry as required by EU Law;
♦ direct access to public information or information held by the Commissioner of Income Tax, for taxable periods commencing with or charges of tax on or after 1 January 2011, on
◊ beneficial ownership of companies and foundations;
◊ settlors, trustees, beneficiaries, assets of all trusts or other legal structures established or managed in or governed by the law of Gibraltar, if these persons are Spanish tax resident or the assets are in Spain.
Those who have connections with Spain should act quickly to ease the possible longer- term effects of the Treaty. The provisions dealing with when the Treaty takes effect may provide a window to organise one’s affairs. Although there is no mention on the face of the Treaty, political declarations have been made to the effect that once the Treaty has been operating for a while, then Gibraltar will be removed by Spain from its list of tax havens.