Do Americans and Canadians living in Spain have to file taxes?

 

Do Americans and Canadians living in Spain have to file taxes

Do Americans and Canadians living in Spain have to file taxes?

A lot of people are unclear about their tax situation when they move to Spain. Do they have to file in Spain? How about tax treaties? Are there exemptions to filing?

I spoke to 4 different Tax advisors, principally because I wanted a 3rd and 4th opinion on an article sent to me by a reader which stated that foreigners do not have to file taxes in Spain. I’ll address that later in this post as well.

 

The General Rule

Are you a tax resident? If any of the 3 points below describes you then you are, under the general rule, a tax resident of Spain and may have to file taxes in Spain.

  • Have you spent more than 183 days in Spain during the calendar year (taking into account temporary absences)?
  • Is your main source of income located in Spain?
  • Are your spouse or children under 18 years tax residents in Spain? 

 

Are you also a tax resident of another country? If one of the above conditions are met it is necessary to check if, according to the internal Tax Law of another country, that person is considered a tax resident in that country (in our case we are talking about the USA or Canada). If this is the case, and only if both countries are considering the individual a tax resident in accordance to their own rules, the Double tax Treaty signed between the countries must be consulted to settle the tiebreaker rules.

I explain all that below.

 

Exclusions under the Double Tax Treaty

What the paragraph above means is that you might be considered a tax resident in two countries. We, for example, qualify as tax residents in both Canada and Spain.

However, there are exclusions in the Double tax treaty between countries that may exclude you having to file in Spain.

 

Thanks to Almudena Soler at B Law & Tax in Madrid for breaking that down for us (below)

 

Canada and Spain have these rules in article 4 of the Tax Treaty:

“(…) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him.

If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closest (hereinafter referred to as his “center of vital interests”);

if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement (…)”.

 

Therefore, the conflict of residence will be solved by applying these rules. If by applying these rules the person is finally a tax resident in Canada, it is important to have a tax residence certificate of Canada (issued in the sense of the Tax Treaty) as well as a tax return filed in Canada including worldwide income.

 

 

The USA and Spain have the same Tax Treaty clause in basically the same language:

“(…) Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);

(b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;

(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement (…)”

Again, if the above tiebreaker rules stipulate that you are a tax resident of the USA (and not of Spain) it is important to have a tax residence certificate of the USA.

 


Definition of a permanent home (again, thanks to Almudena who spelled it out for us)

The permanent home is a house that you have available and with an intention of remaining for a long time. It does not have to be an owned house, it certainly can be rented. A hotel for example would not be considered as a permanent home, but a house rented via Airbnb if it is rented for a few months it could be a permanent home.

If you do not have a house in Canada (owned or rented) you do not have a permanent home there, while in Spain you are renting an apartment so you have a permanent home. Therefore, although we should analyze the situation more deeply, it is highly probable that you are considered a Spanish Tax Resident.


 

As stated above, if you meet the criteria under the Double Tax treaty, you may not have to file taxes in Spain. In that case however, you should get a tax residency certificate from your country so that you can prove to Spanish authorities that you are a tax resident of your home country. My understanding is that you should be proactive about obtaining this certificate because if the Agencia Tributaria contacts you about taxes you have 10 days to prove why you are not filing taxes with them. Since the IRS (in the US) and CRA (in Canada) can take quite a lot of time in producing the tax residency certificate it is best to do it soonest.

In Canada you can contact the CRA (link included). Here is the equivalent for the IRS.

 

 

“Paying Double Taxes” as tax residents of 2 countries

Most people won’t qualify for the tax exclusion under the double tax treaty. Most people for example won’t have permanent homes in both Spain and Canada/US. Those people will have to file taxes in both countries.

No panic though. There is a tax treaty so that means you won’t be “paying double taxes”. What you pay in taxes in Canada/US will be deducted from what Spain calculates as tax payable. For Canadians that may not be much since Canadian tax rates are in the same ballpark as Spanish rates. Americans though may find that they have a balance owing since US rates are lower than Spanish rates.

 

 

Why you should consult a (proper) tax specialist

As mentioned, I consulted with 4 different tax advisors.  4 because the first 2 weren’t consistent in the information I was given.

I highly recommend:

Almudena Soler at B Law & Tax (in Madrid). She answered my questions in writing which I always like. Her email: [email protected]

I also consulted with Mireia Vila Besonias and Meritxell Nadal Bentade at Price Waterhouse Coopers (in Barcelona). We talked on the phone and they was super helpful and essentially confirmed everything Almudena said. Emails: [email protected] and [email protected]

Neither of the above charged me for the consult and they were incredibly helpful with their information and helped me understand our situation better. Everyone has a different tax situation so it’s always best to consult with someone. And one thing I’ve learned filing both personal and corporate taxes in different countries: it’s always best getting someone to do your taxes for you. It’s not something you want to screw around with.

 

Another tip: get the proper tax advice from reputable firms such as the above. Last week I wrote this post: Is Sovereignman.com a fraud?  I wrote that post after a reader sent me an article entitled:  “Here is how you can live in Spain and pay no taxes”. The article basically stated that if you are American (or Canadian) that all you need to do is obtain a tax residency certificate from your home country and you’ll never have to worry about ever paying Spanish taxes. As you can see from this post, it is a lot more complicated than that. So get proper tax advice from a reputable firm.

 

 

The Spanish Wealth Tax

It’s not something I discussed with either Tax specialists but it is something that I get asked about all the time. “Does Spain tax your wealth and if so how much?”. So I looked into the basics of the Wealth tax.

Yes, Spain taxes your wealth and it starts at 0.2% going up to 3.03% depending on your wealth (with the highest rates in Andalucia). Note however that there is a tax free allowance of 700,000 Euros and a further 300,000 allowance if your primary residence is in Spain. So you are basically excluded from paying the wealth tax on your first 1,000,000 Euros.

Again though, these are the general rules. Consult a tax specialist if the Wealth Tax is something that concerns you.

 

 

Have you had experience with filing taxes in Spain? Love to hear your stories and tips…

 
 
 

2 Comments

  1. Hi Frank,

    A good post on what I think us a very important but often under considered area of moving overseas.

    We have been retired for nearly 10 years and are full time nomads. In the last year or so the idea of possibly being based out of Spain, Portugal, Croatia etc has come up and while it is fun to imagine how life would be being based out of an overseas location, the reverie is always broken by the cudgel of the taxman!

    My partner gets a state pension and at some point in the next 5 years will also start receiving Social Security (US based). I rely on dividends and capital gains on my savings and investments.

    We were a bit shocked by the tax rates in Spain on income as well as the wealth tax (which would impact me). Kinda hurts to be penalized for good behavior (saving and investing aggressively for years, keeping cars for much longer than most, paying off $100K student loans in less than 5 yrs by making it a priority etv) only to have the taxman take a cut…and the levels seem pretty low…not tens of millions but €700K, unless one wants to live in Madrid with the associated higher cost of living (not that I am a big fan of living in busy cities)….almost like the Capital city wants to reward those living there at the expense of the rest of the nation. I think Catalunya and Andalusia wealth tax levels are even lower.

    So we are considering perhaps just continuing to be nomads and spend time (limited by Schengen restrictions) and just being tourists in Europe and perhaps moving domicile outside of California to a lower/no tax state.

    Maybe we can weave a longer trip by combining the few non schengen countries with the schengen ones (while I secretly and selfishly hope for more countries to leave the schengen zone!).

    Thanks for the IRS link ro the forms…I did not know about it and might never need them but good to know that it exists should we need one proactively.

    Michael

    1. Thanks for the comment Michael. Yes, I remember us having this conversation before. Tax rates are high in Spain but when I looked into it I was actually surprised to see that they are lower than Canada, and substantially lower than in Quebec where tax rates are the highest in Canada! So moving to Spain is not a detriment for us but I can understand if someone is used to low tax rates that it can be a shock.

      I knew someone who had exactly the same dilemna as you and who ended up not making the move to Europe for exactly the same reason. I fully understand, nobody wants to lose part of their fortune. But at the same time it’s ironic that people have worked hard and saved money and that their decisions end up being dictated by having too much money. Luckily (I guess 🙂 ) I don’t have that issue

      Being a nomad and having lots of money you have tons of options available to you and I would do the same as you. And yes, you can travel around Europe – popping in and out of the Schengen – all year long, it takes a bit of planning but it’s what we’ve done over the last 6 years. Countries are also adopting different visas and residence permits that are allowing for more flexibility, Lissette told me yesterday that Croatia has a digital nomad residency permit that lets you stay in Croatia up to a year. I’m sure other countries have something similar but I can’t think of which at the top of my head. It would be great to find a country within the Schengen that allows that…

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