The New Tax Regime for Expatriates in Spain

Abstract

Section 1(1)(iv) of Act 62/2003 of 30 December concerning social, administrative and fiscal measures (Official Spanish Gazette (BOE) of 31 December) amends the Natural Persons' Income Tax Act 40/1998 of 9 December and other tax rules (BOE of 10 December) by introducing a new para. 5 ins. 9, which became applicable on 1 January 2004. This precept is now found in s. 9(5) of the Consolidated Version of the Natural Persons' Income Tax Act, passed by Legislative Royal Decree 3/2004 of 5 March (BOE of 10 March). Subsequently, this precept was developed by Royal Decree 687/2005 of 10 June, which amends the Natural Persons' Income Tax Regulation, passed by Royal Decree 1775/2004 of 30 July, so as to regulate the special regime for non-residents' income tax and raise the percentage of expenses difficult to justify for farmers and stock breeders using the simplified direct assessment method (BOE of 11 June), with the incorporation of a new Title VII 'Special regime for non-residents' income tax'. Likewise, questions relating to the filing of tax returns were developed by Ministerial Order 1731/ 2005 of 10 June, which establishes the model of natural persons' income tax return to be used by those who pay income tax under the special regime for nonresidents, as well as the form to be used by the taxpayer to notify that he is opting to pay tax under this regime, and amends some provisions concerning other tax return forms used when the regime is applied (BOE of 11 June). This legislation envisages the possibility that natural persons who acquire their tax residence in Spain as a consequence of their transfer to this country may opt to pay tax applying the rules of the Non-Residents' Income Tax Act (rather than those of the Natural Persons' Income Tax Act, which is the general case envisaged in the legislation) during the fiscal year in which the change of residence takes place and the five subsequent fiscal years, provided that certain requisites are complied with. This article focuses on this regime, which a priori appears to be the most favourable, and the objective is to discover any possible disadvantages for the taxpayer that may arise if this option is not exercised properly. Likewise, our aim is to demonstrate the cases and conditions in which it is not advisable for the taxpayer to exercise the option of applying the non-residents' rules envisaged by Spanish legislation.