I. Summary
It is a common misconception to assume that when an individual relocates to a new country, obtaining a tax residency certificate issued by the new country of tax residence automatically grants tax non-resident status in any other country, including in the previous country of tax residence.
This is far from true.
In this article we discuss a real case recently tried by the Spanish Supreme Court that relates to a renowned football player. However, its reasoning touches on international tax principles, and thus it may potentially apply to other countries as well.
The decision highlights the importance of seeking expert tax advice when determining what is an individual’s tax residency, as well as when such individual plans to relocate.
II. The background
The Spanish Supreme Court’s issued its decision number 1214/2024 on 8 July 2024 (“the Judgment”). The Supreme Court redacted the identity of the football player for privacy reasons. Out of respect for the football player and the Supreme Court, in this article we will not disclose the name of the player. We only reflect the background as mentioned in the Judgment.
The case relates to Spanish personal income tax for the year 2014 – in Spain, the tax year runs from 1 January until 31 December every year.
According to the Judgment, the relevant facts of the case were as follows:
- In 2013, the player had an employment contract with the Chelsea Football Club Limited (“Chelsea”) in London, the United Kingdom (“UK”). However, he was lent on loan to play for Valencia Football Club (“Valencia”), in Spain, between July 2013 and June 2014, where he played. In July 2014 he returned to Chelsea. In August 2014, he was lent on loan to the VfB Stuttgart club (“Stuttgart”) in Germany, where he played until 2015.
- The Spanish tax authorities proved that in 2014 the player stayed 172 days in Spain, 30 days in the UK and 131 days in Germany. It could not be proved – neither by the player nor by the Spanish tax authorities – where did the player stay the remaining 32 days of the year 2014.
- The annual amount of salaries received in Spain from Valencia and the amounts deposited in Spanish banks were EUR 1,778,771. The annual salaries received both from Chelsea and Stuttgart combined, including amounts deposited in UK and German banks, were EUR 1,724,237. Therefore, the amounts were higher in Spain than in the other two countries combined. The Judgment does not break down the amount of salaries received per country, although the player claimed that the salaries received from Stuttgart in Germany were higher than the salaries received from Valencia in Spain.
- The player owned a real estate unit in Alcanar, Spain, worth EUR 360,000, which he made available to his sister for her to use. It was not proved that he owned real estate in any other country.
- The player owned two cars in Spain worth approximately EUR 55,000. It was not proved that he owned cars elsewhere.
- The player rented an apartment in Valencia city, from late 2013 until 22 May 2014, where the player was the tenant.
- The player was single and had no children, although his father and sister lived in Spain.
- In the UK, the player had a tax resident but non-domiciled status (known as ‘non-dom’) and was subject to tax on a remittance basis. He did not remit into the UK any income generated outside of the UK.
- The player paid tax as a tax non-resident in Spain and in Germany.
- The player is a Spanish national.
During the tax audit and subsequent judicial procedure, the player submitted a UK tax residency certificate issued in the sense of the Spain-UK double tax treaty (“Spain-UK DTT”), and he claimed that he was tax resident in the UK and tax non-resident in Spain.
The Spanish tax authorities and the lower instance courts argued that the player was tax resident in Spain because his main centre of economic interests was in Spain.
III. The applicable law
The relevant pieces of legislation are the Spanish Personal Income Tax Law (“PIT Law”) and the Spain-UK DTT. Since the player did not claim to be tax resident in Germany and this point was not discussed during the proceedings, there is no need to consider the Spain-Germany double tax treaty.
According to Article 9 of the Spanish PIT Law, an individual becomes tax resident in Spain if he meets any of the following two conditions:
- The individual stays in Spain more than 183 days within the calendar year (1 January to 31 December); or
- The individual has his or her main centre of economic interests in Spain, directly or indirectly.
Under Article 4 of the Spain-UK DTT applicable at the time of the events (later on it was replaced by a new tax treaty), a person is considered tax resident of Spain or the UK if, under the laws of either State, is liable to tax therein by reason of his domicile, residence, place of management, or any other criterion of a similar nature. The term tax resident, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.
If an individual is considered tax resident both in Spain and in the UK pursuant to their domestic tax laws, this situation is known as dual tax residency. Under the Spain-UK DTT, his or her tax residency is determined in the following order:
- In the State where he or she has a permanent home available to him or her. If the individual has a permanent home available in both States, in the State with which his or her personal and economic relations are closer (centre of vital interests).
- In the State in which he or she has an habitual abode
- In the State of which he or she is a national.
- If no other criteria apply, the competent authorities of the two States must settle the matter by mutual agreement.
IV. The Supreme Court’s decision
The Supreme Court upheld the previous decisions of the Spanish tax authorities and the lower courts, and ruled that the player was tax resident in Spain during the year 2014.
The Judgment first applied the Spanish domestic tax residency tests. Given that the player did not stay more than 183 days within the calendar year – or at least the Spanish tax authorities did not prove it -, the Supreme Court examined the main centre of economic interests’ test. The Judgment weighed up not only the salary earned by the player (which would tilt the balance in favour of Germany, not the UK, because the salary earned from Stuttgart was higher than the salary earned from Valencia). It also considered his total income – including passive income such as income from real estate, interests, etc. derived from Spain -, as well as the location of his assets, which were mostly located in Spain. The Judgment stated that his economic ties with the UK were limited to a salary received from Chelsea during the month of July 2014, before being loaned to Stuttgart. As a result, the Supreme Court confirmed the findings of the lower courts and ruled that the player’s main centre of economic interests was in Spain.
Secondly, the Judgment admitted that the player was also tax resident in the UK, considering the UK tax residency certificate submitted by the player. Interestingly, the Judgment did not rule on the most important query raised in the appeal, consisting in whether the Spanish tax authorities and the courts are entitled to disregard a UK tax residency certificate issued to a UK non-dom, on the grounds that a UK non-dom is not subject to taxation on a worldwide basis and is only taxed in respect of UK income and in respect of foreign income which is remitted into the UK. As noted above, Article 4 of the Spain-UK DTT, when defining who is tax resident for the purposes of such tax treaty, provides that “The term tax resident, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.”
Given the player’s dual tax residency, the Supreme Court examined the tie-breaker rules under the Spain-UK DTT. After accepting that the player had a permanent home in Spain and the UK, it concluded that his main centre of vital interests (which is a slightly broader concept than the Spanish domestic concept of ‘centre of economic interests’) was in Spain. Therefore, he was considered tax resident in Spain under the Spain-UK DTT too.
As a tax resident in Spain, the player was subject to personal income tax and wealth tax on a worldwide basis.
V. Our view
It is a common misconception to assume that when an individual relocates to a new country, obtaining a tax residency certificate issued by the new country of tax residence automatically grants non-resident status in any other country, including in the previous country of tax residence. As the Judgment highlights, this is far from true in practice.
Indeed, it is possible that a person with a tax residency certificate from one country is considered a tax resident in another country. In cases where there is no double tax treaty between the two concerned countries, the person enjoys little protection from tax residency claims raised by other countries – care must be taken to not meet the tax residency tests under the domestic laws of such other countries, although they tend to be drafted broadly to draw the highest number of people into their tax nets. Even in cases where there is a double tax treaty between the two concerned countries, the risk also exists as shown in the Judgment – in these circumstances, it is necessary to analyse the tie-breaker rules in the applicable tax treaty and try not to not meet the tests which allow the undesired country to consider the person as tax resident.
Particularly in Spain, the Judgment highlights that when assessing where is the centre of vital interests under a tax treaty, one must consider all the activities and economic interests of the person, including where is the income obtained, what is the location of any real estate and other assets, what is the place from where these assets are managed, as well as any other tie which is relevant to locate the core of the activities and economic interests. Interestingly in this case, the player was considered to have his centre of vital interests in Spain – even though the salary obtained from Germany was higher than the salary obtained from Spain -, because all his income and assets arising from/located in Spain were higher than those arising from/located in Germany or the UK. Therefore, for Spanish tax purposes it is not enough to compare where does most of the salary earned during the year come from – both income and assets must be considered holistically.
Several valuable lessons can be drawn from the Judgment:
- Individuals can be considered tax resident in a country – and often they are in practice -, even if they stay less than 183 days inside such country.
- The source/location of all the income, assets and economic and personal interests of a person are taken into account when assessing the centre of vital interests.
- Tax residency certificates issued in the sense of double tax treaties are necessary, but they do not grant automatic and infallible protection in all cases.
In summary, individuals that spend significant time or have significant economic and personal ties in more than one country, should analyse the tax implications in each of them. Since each country defines tax residency according to its domestic laws, conflicts often arise. Each tax treaty must be analysed, including its tie-breaker rules, as well as its principal purpose test, limitation of benefits and similar clauses.
In the past, tax residency conflicts were a matter of concern to a reduced number of mobile people such as artists, sportsmen and top executives. However, the emergence of remote work and digital nomadism leads to more and more people joining an international lifestyle.
An international, mobile way of life can be a blessing and an opportunity to discover new cultures and places, and meet enriching people.
However, it also comes with challenges. In the realm of tax, it comes with increased responsibilities on people, who must determine and regularly check their tax residency status.
Finally, the Spanish Supreme Court did not discuss a key question – whether a person who is tax resident in a country and is taxed in such country on a limited basis and not on a worldwide basis (e.g. a UK non-dom taxed on a remittance basis, a NHR in Portugal, a person residing in a country with a territorial tax system) qualifies as tax resident in such country for the purposes of the applicable double tax treaty? In other words, whether the tax authorities and courts can disregard a tax residency certificate issued by such country to said person, even if it is issued in the sense of a double tax treaty? The reason, as explained above, is that most tax treaties do not consider a person as tax resident in a country if such person is liable to tax in that country only in respect of income from sources in that country. Note that according to the OECD’s Commentaries to the OECD Model Tax Convention, being tax resident in a country with a territorial tax system does not, in itself, preclude the person from qualifying as tax resident in such country for tax treaty purposes. Indeed, the matter is nuanced and unresolved at the international level. Accordingly, people residing in countries with a limited system of taxation (e.g. non-doms, NHRs, Italian flat tax regime beneficiaries, people residing in countries with territorial tax systems) may potentially be exposed to tax residency claims by other countries, if they meet any of the broadly drafted tax residency tests under the domestic laws of those countries. Since the question relates to the interpretation of double tax treaties and not just the Spanish tax laws, the issue may potentially appear in any country in the world, depending on the wording of each tax treaty and the domestic legislation.
VI. How can we help?
Our tax team regularly advises clients on international taxation matters and related aspects, such as tax residency conflicts. They also analyse and advise on the tax implications of relocating, including the tax implications in the exiting country and the destination country. They also support clients with the practical steps of such relocations, including visa and residence permits, formalities required, purchase of real estate, setup of businesses and other aspects.
Do not hesitate to contact us if you need any assistance.