Tax residency in Spain and the 183-day rule explained

Registered residence is a key issue for all residents living in Spain for an extended period. It plays a role in many important matters. Whether it concerns the applicable inheritance law, visiting the doctor, a driving licence, working from home – or tax.

The Spanish tax authorities are not to be trifled with. A very well-known Colombian singer recently learnt this the hard way – and at great expense. Unfortunately, determining where one’s tax residence lies, in accordance with the laws and regulations of both countries, is anything but straightforward. This is because it is not simply a matter of formalities – in other words, where you are registered and when.

What matters far more is where you are ‚resident‘ for tax purposes. Put simply, this is the centre of your life. But where exactly is that? As a German national, isn’t it always Germany? Or is it Spain if I am registered and listed as living there? The following article answers these questions:

The Canary Islands: Residence and Spanish Tax

Faced with these conceptual uncertainties, many residents turn a blind eye and do nothing. Until the Spanish tax authorities rudely rouse them with a back-tax claim covering the past four to five years. The real-life example of a poor, rich singer serves as an illustration and a warning.

After four years of tough but fruitless negotiations between the lawyers and the Spanish tax authorities, the artist was charged with tax evasion in Barcelona. The Spanish public prosecutor’s office sought a prison sentence of eight years and two months, as well as a fine of 23.5 million euros.

Right up until the end, the singer had maintained her innocence. Then, however, on 17 November 2023, the day the trial began, she agreed to a settlement with the prosecution: the multi-millionaire pleaded guilty and accepted a three-year prison sentence, which she will not, however, have to serve. Instead, the artist will pay 7.3 million euros in compensation for the damage caused. In addition, she will make a payment of 432,000 euros. She had previously paid 17 million euros in back taxes and interest.

Permanent residence in the Canary Islands: tax liability in Spain after 183 days on the island

What was the singer accused of? She is alleged to have lived in Spain for at least 183 days a year between 2012 and 2014, rather than in the tax haven of the Bahamas as required. This would have made her liable for tax there. She disputes this, as she is known to have travelled extensively around the world.

However, the prosecution had called around 120 witnesses to confirm that the singer had made false statements regarding her centre of life and place of residence, thereby defrauding the Spanish tax authorities of just under 14.5 million euros between 2012 and 2014. She had moved to Barcelona in 2011 to be with her partner, a well-known Spanish footballer. Yet she had declared the Bahamas as her tax residence.

The artist is not the only one to have caught the attention of the Spanish tax authorities. For instance, a professional footballer had to pay twelve million euros in back tax and was only able to avoid a prison sentence by paying a quarter of a million euros. Another had to pay a whopping 18.8 million euros in back taxes in 2018. And for the artist, the matter is not yet over: she faces a further charge of evading income and wealth tax amounting to 6.7 million euros in 2018.

Spanish tax: What do German residents in the Canary Islands need to bear in mind?

Very few people will have a secondary residence in a ‚tax haven‘. In most cases, this is actually in Germany, where tax rates are broadly similar to those in Spain. Nor are sums running into tens of millions likely to be involved so quickly. However, at 52 per cent, the top tax rate in Spain is significantly higher than in Germany, where it stands at 46 per cent.

If it is discovered that someone was in fact liable for tax in Spain, tax claims for the last four to five years may be made. These could amount to considerable sums. Furthermore, particularly high fines may be imposed in Spain if the tax has not been declared correctly – not to mention possible prison sentences.

Can you at least claim a refund of the tax paid in Germany? The German-Spanish tax law expert, lawyer Abogado Frank Müller, believes this is a matter to be decided on a case-by-case basis, taking into account the exact circumstances, the duration and, possibly, the taxpayer’s conduct.

Overall, the expert considers this to be questionable, as setting up a deliberate scheme to avoid tax abroad – with subsequent claims for refunds should the scheme fail – could contravene the principles of good faith, which are also recognised by the Federal Finance Court. So it’s best not to take any chances!

How can German residents of the Canary Islands avoid the Spanish tax trap?

The German-Spanish double taxation agreement and Spanish national legislation stipulate that – to put it simply – tax liability depends on which country a person lives in predominantly, i.e. where their centre of life is. In tax law, the term used is ‚residency‘ in one country or the other, rather than ‚place of residence‘.

This is normally determined using the 183-day rule: taxes must be paid in the country where the taxpayer has lived for more than half the year. In this case, the law-abiding German will register with their local tax office using ‚Form 030‘. They will also declare their assets in Germany using ‚Form 720′, provided their value exceeds 50,000 euros.

None of this has anything to do with registering with the local authority (empadronamiento) or the compulsory registration with the immigration authorities (registro) required after three months‘ residence. As is well known, neither of these indicates ‚residence‘ or the true centre of one’s life, but they may be used by the tax authorities as evidence of residence, which the person concerned must then refute.

Even the N.I.E., which virtually everyone who stays in Spain for any length of time has, is simply the Spanish tax number for foreign nationals. It is a prerequisite for almost any financial transaction – from opening a bank account to paying an electricity bill.

However, it says nothing about residency or place of residence. That said, when applying for your N.I.E., you ticked a box: ‚residente‘ or ’non residente‘. You should ensure that you tick ’non residente‘ where applicable, so as not to attract the attention of the tax authorities.

Centre of life in the Canary Islands: How is the 183-day rule determined in Spain?

Once the tax authorities have become aware of a potential tax evader, they have become extremely resourceful in their investigations. They examine electricity and water bills, bank statements and credit card statements. You should therefore document all journeys to Germany and back to Spain in detail, and make sure you keep all travel receipts.

In the singer’s case, the public prosecutor’s office named the witnesses after the investigators had carried out extensive enquiries in the local area: they interviewed neighbours, make-up artists, hairdressers, gynaecologists and dance teachers – to name but a few.

However, even if you end up spending more than 183 days in Spain, all is not lost. You can also prove that your centre of life is in Germany by demonstrating that you have particularly close ties to Germany. This primarily involves being in employment in Germany, including working from home.

However, private life is also important: for example, spouses and children may live in the applicant’s home in Germany, parents in need of care may be looked after, memberships of associations may exist, political office may be held, and visits to German doctors may be made on a regular basis. The list is not exhaustive and may be expanded if the examples merely demonstrate a close connection to Germany, where the ‚centre of life‘ must be located.

The famous (fictitious) address at your children’s home in your home country, on the other hand, is not a good idea. In an emergency, such a postal address is worthless. However, a ‚certificate of residence‘ from the German tax office may be helpful, although this is not always accepted by the Spanish tax authorities.

Is a long-term holiday in the Canary Islands a tax trap? The experts‘ verdict

Anyone receiving a statutory German pension or who is registered with the immigration authorities should expect to receive correspondence from the tax office. Spanish and German tax authorities exchange information.

If you feel that your centre of life is in Spain but have not yet been contacted by the tax authorities, the question arises as to how you should proceed. Only a tax adviser can fully assess whether Spanish tax would be disadvantageous for you, taking into account the double taxation agreement.

If you wish to continue to keep a low profile, bear in mind that your centre of vital interests gives rise to further legal consequences, such as capital gains tax and inheritance tax. And the question of whether German or Spanish inheritance law applies. The latter can lead to major disputes after your death, as Spanish inheritance law, for example, places spouses at a significant disadvantage compared to children.