Author: Miriam Sánchez.
Lets talk about: Tax obligations for Expats (Expatriate workers), a roundabout way with Expats. Expats who are still non-residents must report their income in January. It is becoming more and more common for foreign workers to move to Spain on a temporary basis to provide services for a Spanish company, they are commonly known as Expats, expatriate workers. The issue is that, during the first months, they are considered non-residents for tax purposes, which is very important when determining their tax obligations. During this initial period, they are still considered to be tax residents in their home country and their tax liability is limited to the salary they receive from their Spanish employer.
How to know if you are resident or non-resident
Tax residency is obtained if, within the fiscal year (in Spain within the calendar year) 183 days have been reached.
A worker who moves to Spain has to spend more than 183 days in Spain, within a calendar year, to be considered a tax resident. There are some nuances that have to be seen on a case by case basis, for example, temporary absences (a weekend in London) are considered as residence in Spain for these purposes.
Thus, if a foreign worker starts working in Spain in January, during the first 183 days he/she will be considered as a non-resident, but from the 184th day on, he/she will be considered as a resident.
This circumstance is important, during the first 183 days (from January to June) the worker will be a non-resident and the withholding in his payroll will be at a fixed rate, from July the withholding will be at the ordinary IRPF. We will come back to the subject of withholdings later.
If the worker starts working in Spain in January the regime is clear, it gets a little more complicated if the worker is displaced during the fiscal year and does not reach 183 days.
What happens when the displacement is at the end of the year?
A particular case is when the worker is posted to Spain near the end of the year, when it is not possible to reach the 183 days in that year.
For example, someone posted to Spain on September 1st will arrive at the end of the year with a maximum of 122 days, will never reach 183 days in his first year and will therefore be a non-resident during that first year.
The peculiar thing happens the following year, in which the counter is reset to zero on January 1 and the previous 122 days are excluded from the calculation, i.e. the 122 days elapsed between September and December are not taken into consideration, they are not counted, since they belong to the previous fiscal year.
It happens therefore that the employee will remain a non-resident between January and June of the following year and from July onwards he will start to be a tax resident in Spain for all purposes, including the withholding tax rate applied to his salaries.
How are withholdings determined on Expat payrolls?
Foreign workers who move to Spain and receive a salary from a Spanish employer have their salary subject to withholdings, while they are considered non-resident taxpayers they are withheld on account of the non-resident income tax (IRNR) and once they become residents in Spain the withholdings become IRPF (Impuesto sobre la Renta de las Personas Físicas).
That is to say, the withholding rate of the Expat will vary during his stay in Spain, initially it will be a fixed withholding rate on account of the IRNR, 19% if he is a national of a country member of the European Union or 24% if he is a national of a country that is not a member of the European Union.
Once the Expat becomes a tax resident in Spain, the withholding will become on account of IRPF and will be calculated according to the ordinary procedure, i.e., calculating his income until the end of the year, determining his family situation and finding an annual amount of withholdings, from which a percentage results. This is the same method as that applicable to all other workers. Unless the employee has opted for the Beckham regime.
Expats, in this calculation, are taken into consideration the remuneration received previously as non-residents as well as the withholdings made on account of the Non-Resident Income Tax (IRNR) that we have mentioned before. This is a process of recalculation of the withholding rate.
What about Expats’ annual tax returns?
If in the first year of residence, the worker has remained as a non-resident, he/she is obliged to file the Form 210 corresponding to the annual declaration of the Non-Resident Income Tax (IRNR), before January 20.
In fact, the declaration does not involve the payment of any amount, but the non-residents who summarize the income received as non-residents are obliged to make this declaration.
If the employee has become a tax resident, that is to say, if he/she has exceeded 183 days of residence within the same fiscal year, the employee is obliged to make his/her annual tax return, in this case by making the annual IRPF (Personal Income Tax) return, which is carried out between April and June.
If the employee has applied for the Beckham Regime, he/she has to declare his/her annual income also in April and June of the following year.
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