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The Implications of the Spain Gibraltar Tax Treaty

Saturday, 09th March 2019

The Implications of the Spain Gibraltar Tax Treaty  Image

A new tax treaty between Spain and Gibraltar was entered into on 4th March 2019.  In this article, we examine the likely impact for our clients and the Gibraltar property market in general.

The Agreement enters into force on the date of the later of the Parties’ notifications that they have completed their internal procedures.  This means that the UK and Spain will have to pass the necessary legislation in their own parliaments to effectively ratify the treaty.  Given the forthcoming Spanish general election on 28th April it cannot be certain how long this will take.  Although the treaty is not reliant upon Brexit, if we leave the EU on 29th March 2019 as currently envisaged, then I would imagine the treaty could, in theory, become law quite quickly.  If Article 50 is extended, postponed or cancelled, then the likelihood is that the implementation of the treaty will be delayed or cancelled as well.  

The treaty, which is not an OECD standard model treaty but a bespoke treaty indicating Spain’s concerns over existing tax issues, creates a set of rules to define residency, prevent double taxation and enforce complete transparency between Spain and Gibraltar on tax matters.

The stand out clause in my view is Article 2, section c) part ii).  It states: “Non-Spanish nationals who provide proof of their new residency in Gibraltar shall not lose tax residency in Spain. This rule shall apply in the tax period in which the change of residency is made and during the four subsequent tax years. This paragraph shall not apply to non-Spanish nationals that spend less than one complete tax year in Spain or registered Gibraltarians that spend less than 4 years in Spain.”

This will have two major impacts when it comes to the Gibraltar property market.  Firstly, the few thousand non-Spanish employees of Gibraltar companies who are contemplating living in Gibraltar, have potentially just a few weeks to exit Spain to escape the clutches of the Spanish tax authorities and the higher Spanish tax rates.  Although the Gibraltar Government stated “Publication [of the treaty] will enable potentially affected tax payers to understand how best to structure their affairs and regularise their positions going forward”, it would appear that there is potentially very little time for this section of Gibraltar’s workforce to regularise their affairs.

The uncertainty arising from the above clause is the actual tax status of an individual given the move date from Spain to Gibraltar.  The treaty does not come into force until the above ratification events have occurred.  So the treaty is not in force at the time of writing.  The treaty talks about the tax period (note, not tax year) that the change of residency is applied plus four subsequent tax yearsPeriod is not defined.  Hence it is difficult to make any conclusion as to how an individual would be taxed in Spain if they moved to Gibraltar today for example. On the face of it, it would appear that Spain can only initiate the 4 year rule on tax residency changes after the treaty comes into force.  I do not think it is conclusive.  However, having to keep Spanish tax residency for another four years after having moved to Gibraltar does seem somewhat punitive. (*)

The exemption to this rule is non-Spanish nationals moving in and out of Spain in the same tax year, and, Gibraltarians who have resided in Spain for four years or less.

So what is the likely impact of this clause on the Gibraltar property market.  We foresee two ramifications.  Firstly, those who are Spanish tax resident currently and have the means to switch to Gibraltar in the very short term, are likely to do so, on the basis that they should escape the above Spanish deemed residency rule for four years (this is my interpretation of the 4 year rule but I don’t think it is guaranteed).  Perhaps there will be a short term rush on Gibraltar apartment rentals and Gibraltar residency applications.  Once the treaty is in force, it is unlikely that non-Spanish nationals will move to Gibraltar purely for tax reasons, as there is no point from a fiscal perspective if you cannot lose Spanish residency for another four years after moving.  Indeed, those who want to leave Spain, may be best advised to take up residency in the UK or Portugal for a period of time to remove themselves from Spain and only then come to Gibraltar. 

Meanwhile, the second impact, is that new employees coming to Gibraltar often weigh up the pros and cons of living in Spain and Gibraltar and perhaps half have historically chosen Gibraltar and half Spain.  The above new rule will be highly persuasive for them to choose Gibraltar and not Spain, especially the higher earners who suffer the most from the different rates of tax in Gibraltar and Spain.  Demand for Gibraltar property will increase.

The remainder of the treaty is quite predictable and understandable although it will have a financial impact on those Gibraltar employees living in Spain who have not properly paid their taxes in Spain as the current law requires.  Upon the treaty coming into force, the Gibraltar Income Tax Office will provide Hacienda with all earnings and tax records of Gibraltar employees with a Spanish address starting with information held from 1st January 2014.  So for those who haven’t paid their taxes as they should have done, the Spanish tax office is soon going to have the information to issue tax demands.  Thereafter tax information exchange will be on-going. 

The necessity of a treaty is clear.  After exiting the EU, without this treaty, there would be no legal reason for Spain to allow the tax paid in Gibraltar to be deducted from tax due in Spain, i.e. non-Spanish nationals living in Spain and working in Gibraltar could have faced double taxation.  This treaty ensures that will not happen.

It would be useful if the Gibraltar tax office allows local tax payers to see what information is being shared before it is passed over to Spain.  Errors do happen and if incorrect information is passed across I would expect a difficult time for the taxpayer to rectify any error made.  Hacienda is notoriously difficult to deal with.(**)

The treaty provides for a Joint Coordination Committee to assist with any difficulties arising between the Spanish and Gibraltar tax offices.  Article 5 states:

(1) The Parties shall create a Joint Coordination Committee formed by the Authorities designated by the Parties, which shall supervise and coordinate the cooperation activities set out in this Agreement.

(2) Additionally, the aforementioned Joint Coordination Committee shall endeavour to resolve by mutual agreement, any difficulties or doubts arising as to the interpretation or application of this Agreement, in particular regarding Article 2 [defining tax residency], in those specific cases where all the authorities forming the Joint Coordination Committee so decide.

Politically, this treaty has been heralded as a major coup in so far as Spain recognising Gibraltar as an autonomous jurisdiction “What we have achieved is that finally Spain and Gibraltar have an agreement on taxation and this will take the whip hand away from Spain, who will no longer be able to argue that Gibraltar fails to cooperate on matters of taxation.  It protects Gibraltar as a separate and autonomous tax jurisdiction” the Chief Minister said. “It is recognising that we have a Parliament with separate legislative function and power.”

It will be interesting how tax experts interpret the tax treaty.  I’m not a tax expert, however, already, clients have contacted us for guidance.  We have always encouraged living in Gibraltar for those employed in Gibraltar who can afford it.  If this treaty is ever enforced which is very likely, think twice before taking actions which may inadvertently result in Spanish tax residency.

Should you have assets, physical presence or a business in Gibraltar and Spain then we encourage you to seek advice from your tax advisor.

*Editor's note 15th March 2019:  Since the publication of this article, a leading law firm in Gibraltar has given its opinion that clause 2)c)(ii) will be applicable starting 1st January 2020.  Therefore, according to their advice, non-Spanish residents can leave Spain for Gibraltar in 2019 without the fear of four more years of deemed Spanish tax residency.

**Editor's note 14th March 2019:  Mike Nicholls asked a question to the Chief Minister on GBC's Viewpoint (58 minutes and 55 seconds into the programme) on 14th March in respect of individuals who are concerned about what information the Gibraltar Income Tax Office will share.  The Chief Minister confirmed that individuals have the right to ask the Income Tax Office to notify them of what information they will share ahead of them sharing when asked to do so within four months of the ratification of the Treaty.  We encourage concerned individuals to do so as it will be very difficult to correct errors once the Spanish Tax Office has the information.


You can read the full text of the Spain Gibraltar Tax Treaty here.

You can read the Summary Notes of the Spain Gibraltar Tax Treaty here.

Contributed by Mike Nicholls