The following is a reminder of the requirements to qualify for total or partial foreign earned income exemption, by virtue of section 7 p) of the Income Tax Act (Ley de IRPF), which applies to Spanish tax residents.
Provided the relocation does not involve losing Spanish tax resident status, there are systems that allow tax exemption on all or part of foreign earned income.
Requirements:
- The worker must move abroad to provide services, by virtue of which a non-resident company in Spain benefits from said services.
- If the worker moves abroad to provide services for another company of the non-resident corporate group in Spain, the latter must benefit from the services.
- Whatever the case, the above must be proven by regulating the services between companies, through contracts that record the services, invoices issued for services rendered to the non-resident company in Spain and, ultimately, any additional proof that can be submitted to justify the required ‘value added’.
- In the destination country, there must be a tax that is similar to the Spanish IRPF and it must not be considered a tax haven. This requirement will be considered to have been met when the country or territory in which the income is earned has signed an international double taxation agreement with Spain containing an information sharing clause.
If the requirements are fulfilled, the worker’s accrued earnings during the temporary relocation abroad will be exempt up to a maximum of €60.100 a year.
In accordance with this rule, we recommend compiling the justification documents for each relocation, which must contain the following at least:
- Copy of airline tickets, accommodation, meal and taxi receipts, copy of visas to enter the country of destination, copy of passport with stamp on entering and leaving the country of destination, and so on.
- There should be an annex to the employment contract that sets out the relocation terms and conditions, specifying the project in question, company/client for which the work is performed, length of time spent abroad and other terms and conditions.
- Copy of the services order form for the company in Spain and a copy of the invoice issued to the client for the services rendered, specifying the work performed.
- Any other documentation that proves the services rendered to a third company.
The Tax Office can review the documentation that resulted in full or partial foreign earned income tax exemption. If it cannot be proven that the requirements have been fulfilled, or that the earning were not for services for a non-resident company in Spain, the exemption may not apply to the relocated worker’s earned income.
Management or representation services within a Group
When the recipient of the services is linked to the worker’s employer or the company in which the services are rendered, the requirements set out in paragraph 5 of section 18 of the Corporate Tax Act 27/2014, must be fulfilled, whereby “the services rendered must produce or have the potential to produce a benefit or profit for the recipient”.
If the recipient of the management or representation services is directly the Spanish company (because there are no Permanent Establishments or Subsidiaries Abroad), the exemption will not apply.
The Central Economic Administrative Court (TEAC) establishes cases of allowance in which the recipient of the services is the foreign subsidiary and not the actual Spanish company when the following requirements are fulfilled:
- A service must be effectively rendered abroad for another company in the Group, meaning that the worker must move abroad to perform the work.
- The work/service must generate direct profit and value added for the non-resident company.
- The service must be necessary for the non-resident company such that it can be hired out to an independent company.
The OECD has ruled on management services (a criterion which was accepted by our own Courts of Justice), establishing the activities that can generate a benefit or profit (value added) for the recipient within a corporate group. Those services are the following:
- Administrative services including planning, coordination, budget control, financial advice, accounting, audits, legal services, factoring and IT services.
- Financial services including supervision of cash flows and solvency, capital increases, loan agreements, interest rate and exchange risk management and refinance.
- Assistance in production, purchasing, distribution and marketing areas.
- Personnel management services, including recruitment and training.
- R&D&i services and managing and protecting the group’s intangible assets.
In accordance with the OECD’s guidelines, the Spanish Tax Office addresses these issues by checking whether the benefit or profit exists for the recipient of the services in the case of related-party transactions according to whether the recipient company had been willing to pay a third company for the services.
By contrast, the following services cannot generate this value added:
- Organizing general shareholder meetings, issuing this company’s shares or board of director operating expenses.
- Costs in relation to the parent company’s obligations to keep accounting records of transactions.
- Costs to raise funds to buy shareholdings.
Commercial Work
The exemption does not apply to commercial work that results in profit for the Spanish company’s trading account and is not therefore performed for a foreign company.
However, commercial activities within the group could generate added value when, due to the Group’s operating circumstances, those activities could have been hired out to an independent company to the benefit of the recipient. These could be considered intra-group services in accordance with paragraph 5 of section 18 of the Corporate Tax Act.
In such cases we recommend a cautious approach to applying section 7p of the Income Tax Act, and that you firstly arrange a tax consultation with the General Directorate for Taxation.
Arrabe Integra
Tax Department