Spanish tax authorities cannot override tax residence certificates

In a decision published on 12 June  2023, the Supreme Court confirmed that the Spanish Tax Authorities (STA) cannot simply override  a tax residence certificate issued by a foreign tax administration for the purposes of Double Tax Treaties (DTT) on the basis of Spanish domestic tax residence indicia. In all such cases, the STA must apply the tie-break provisions included in the relevant DTT instead.

Background

The STA have applied a controversial approach to tax residence certificates according to which, in certain cases, the validity of those tax residence certificates issued by foreign tax authorities for the purposes of a DTT may be challenged and disregarded by the STA if they consider that there are sufficient indicia to treat a person as Spanish tax resident under domestic law provisions.

In the case under analysis, a US and Moroccan national held relevant real estate properties in the Canary islands, where he regularly stayed for between 56 and 91 days per year, as well as Spanish bank accounts through which he regularly received the payment of remuneration for his professional services to a Singaporean business which he partially owned, as well as several luxury vehicles.

Initially, he provided a tax residence certificate from Morocco to evidence his tax residency in Morocco, however this was not issued by the competent authority and thus it was disregarded by the tax inspector. During subsequent tax litigation, the individual was able to provide a tax residence certificate issued by the IRS specifically stating that he was US tax resident for the purposes of the US-Spain DTT (ie a treaty residence certificate). The STA also disregarded this treaty residence certificate on the basis that it was granted based only on his US nationality and considering there was other evidence showing his tax residence in Spain (the aforementioned wealth and economic links), whilst he had not been able to prove any personal taxation at all in the US during those years.

This approach was confirmed by the court initially ruling on his case, the Audiencia Nacional, which surprisingly omitted any reference to treaty provisions justifying the conclusion but rather based its confirmation on the assessment that there was sufficient evidence to consider that the individual's centre of economic interests was located in Spain in accordance with Spanish domestic law (personal income tax law).

Supreme Court criteria

The Supreme Court confirms that the validity of tax residence certificates issued for the purposes of a DTT must be automatically presumed, since it is not for the judicial or administrative authorities to assess such validity. So pursuant to the Supreme Court's decision, the STA should have followed the rules established in the DTT if they wanted to challenge the treaty tax residence certificate issued by the IRS. DTTs are international bilateral conventions that, under Spanish law, apply on top of the domestic law and the STA cannot simply ignore them nor any resolutions adopted by the counterparty to that bilateral convention on the basis of treaty provisions.

In the Supreme Court's view, this implies that, if under Spanish domestic law an individual may be considered tax resident in Spain, and such individual provides a tax residence certificate issued by the relevant authorities of other jurisdiction for the purposes of a DTT, the discrepancy must be resolved in accordance with the tie-break rules established in the DTT. This means that the STA cannot simply impose their own criteria ignoring such tie-break rules nor the rest of DTT provisions generally.  

The Supreme Court also makes relevant clarifications in relation to the concept of "centre of vital interests" included in the OECD's tax treaty model convention. The Supreme Court confirms that "centre of vital interests" is not equivalent to the concept of "centre of economic interests" included in the Spanish domestic law, since the treaty concept includes a dual personal/economic element which goes beyond the purely economic approach (wealth/income) foreseen by the Spanish domestic legislation. Therefore, the analysis of the tie-break rules must not be limited to the economic interests of the individual but should also consider his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his properties, etc.

Comments

This decision should be welcome by all non-residents holding large real estate assets in Spain and who are able to evidence the tax residence in another jurisdiction for the purpose of a DTT. It confirms that the STA cannot simply determine the tax residence of an individual based on domestic law criteria (the centre of economic interest as a result of owning a large real estate asset) but rather the relevant tie-break rules in article 4 of the DTT must be followed, which must also involve an assessment of all non-economic circumstances of the individual (vital centre of interest).

This decision partially counterbalances the aggressive approach usually taken by the STA when assessing tax residence in Spain, requiring a significant evidential effort by the taxpayer to prove the non-tax residence in Spain even when a DTT tax residence certificate is provided (see our recent article Spanish Courts clarify criteria to determine Spanish tax residence).  However, it seems surprising to us that the Supreme Court just focuses on the tie-breaker rules in article 4 of the DTT and does not make reference to the potential need for the STA to initiate a mutual agreement procedure with the tax authority of the other State if they intend to challenge the DTT tax residence certificate issued by such competent tax authority.

The impact of this decision is even more significant for certain cases under the spotlight of STA, in particular taxpayers under special regimes for non-domiciled residents (UK, Italy and Portugal), whose residence certificates have sometimes been rejected on the same grounds as those set out in the Supreme Court ruling. Very recently, the Spanish Supreme Court announced that it has accepted for review a case concerning a UK tax residence certificate provided by an individual subject to the non-dom regime. Hopefully the Supreme Court will take this opportunity to further reinforce and stress the position displayed in this ruling, but we will need to await this further decision to confirm the point.

Another downside of the decision is that the Supreme Court did not rule on a very relevant additional question which they were expected to cover, ie if the sole fact of having a large non-productive real estate asset in Spain is enough to conclude that the taxpayer's centre of economic interest is in Spain, and as such that individual is Spanish tax resident. The Court simply states that under no circumstances may the DTT provisions be disregarded (not even as a result of owning a large real estate asset ) so the relevant tie-break rules must be followed to complete the relevant assessment, but does not expressly offer its view on this point.