This special tax system was introduced in Spain by way of Act 62/2003 in an effort to encourage qualified workers to come to Spain, and is currently contained in article 93 of the Income Tax Act 35/2006 and in articles 113 to 120 of Royal Decree 439/2007 containing the Income Tax Regulations.

As we will see in Chapter 4 of this cycle a number of neighbouring countries have introduced similar systems, and it should be stated at this point that the Spanish system is not the best or the one which provides the greatest legal certainty for the taxpayer.

The System consists principally of the option for the newly arrived Spanish tax resident of paying tax as a non-resident on income obtained in Spain; without ceasing to be a resident for tax purposes and only for a period of 6 years (the year in which residency was acquired and the following five years).

This System is optional and whether or not it is advisable to use it must always be assessed on a case-by-case basis; it should not be generally applied without first having looked at all of the repercussions it may have, which we will be examining in the course of this cycle.

It should also not be forgotten that it is an individual option and thus only the taxpayer meeting its conditions can opt for its application; if the spouse accompanying the foreign worker does not meet these conditions he or she will have to pay tax as a Spanish tax resident.

1.- Requirements for the System to apply:

Article 93 of the Income Tax Act lays down the following requirements for the option of using the System, each of which will be analysed below:

1. The taxpayer must not have resided in Spain in the ten years prior to moving there.
2. The move must be a consequence of an employment contract.
3. The work for which the employee has been hired must be carried out in Spain.
4. The work must be carried out for a company or entity residing in Spain or for a permanent establishment located in Spain of an entity not residing there.
5. The income from the work deriving from the employment relation must not be exempt from tax under the Non-Resident Income Tax Act.
6. Since 2010 there is a requirement that foreseeable remuneration under the employment contract in each of the tax years in which the special system is applied must not exceed the sum of 600,000 euros a year.

1.- The taxpayer must not have resided in Spain in the ten years prior to moving there:

As a first step it must be taken into account that as this is a special system contained in the regulations on Income Tax, it seems clear that it can only be applied to those employees who have acquired tax residence in Spain previously and in accordance with the provisions of article 9 of the Income Tax Act 35/2006 and who have not had this status in the previous 10 years. This obviously does not mean the employee must not have been in Spain at all in the last ten years, but his presence must not have resulted in him acquiring tax residence.

Problems arise when we consider the application of the system to employees who acquire Spanish tax residence as a result of economic interests or family links.

In view of the wording of the regulation it would seem logical to assume that the Special System for Inpatriates can only be applied in those cases in which there is a prolonged stay in Spain, and that it would not make sense to apply it in cases in which residence is obtained as a consequence of the application of the other two criteria for attribution of tax residence in Spain and there is therefore no such prolonged presence. This would also be at odds with the other requirements as we will see below.

The tax authorities have not taken a clear line on this question, the responses of the General Tax Directorate merely referring back to article 9 of the Income Tax Act.

Without prejudice to the above, the Income Tax Regulations provide that the first year in the application of the Special System is that in which the taxpayer is in Spain for more than 183 days. This would seem to preclude application to inpatriates who become Spanish residents due to family links or economic interests, even if they enter the country as a consequence of an employment contract.

2.- The move must be a consequence of an employment contract:

The regulation provides that the move to Spanish territory must be as a consequence of an employment contract. It adds that this condition is met where an ordinary or special employment relation or one as a public official commences with an employer in Spain, or where the move is ordered by the employer in writing, and the taxpayer does not obtain income which would be classified as obtained by way of a permanent establishment located in Spain.

The requirement that the move occur as a consequence of an employment contract would appear not to allow the application of the system to workers who move to Spain in order to look for work. The employment contract must therefore be the cause of the worker moving to Spain.

Also, and unlike the practice in other countries, the system is only applicable to employees and not to self-employed persons, and thus it will not apply to self-employed workers who come to Spain as a result of commercial agreements.

3.- The work for which the employee has been hired must be carried out in Spain.

The regulations require the work to be carried out in Spain. They also provide that this condition will be met even if some of the work is carried out abroad provided the total remuneration for such work, whether or not it is considered income obtained in Spain in accordance with article 13.1.c) of the restated version of the Non-Resident Income Tax Act as approved by Royal Legislative Decree 5/2004 of 5 March, does not exceed 15 percent of all income received from work in the calendar year. Where pursuant to his employment contract the taxpayer takes on functions outside Spain in another company of the same group of companies, as defined in article 42 of the Commercial Code, this limit is raised to 30 percent.

Where it is not possible to establish the amount of remuneration specifically corresponding to work carried out abroad this is calculated based on the number of days the employee has been outside Spain.

As a result of this those employees who keep the special System despite receiving income from work abroad will see how this income is exempt from tax insofar as it is not deemed to be obtained in Spain. This is so as the expatriate does not pay tax on income from a non-Spanish source.

4.- The work must be carried out for a company or entity residing in Spain or for a permanent establishment located in Spain of an entity not residing there.

It is also necessary for work carried out in Spain to be for a company or entity resident in Spain or for a permanent establishment in Spain of a non-resident entity. This condition is deemed to be met where the services are for the benefit of a company or entity resident in Spain or a permanent establishment in Spain of a non-resident entity. Where the move occurs within a group of companies as defined in article 42 of the Commercial Code, and exclusively for these purposes , the worker must be hired by the company of the Group resident in Spain or the move to Spain must be ordered by the employer.

It could be asked what happens in cases in which the employer is a non-resident company and hires a non-resident to work for a resident company outside the group, the worker acquiring Spanish tax residence as a result. In cases such as these, often referred to as «secondments», in literal terms all of the requirements of the regulation are met but it is not clear whether the system could be applied, the General Tax Directorate not yet having issued any ruling in this respect.

5.- The income from the work deriving from the employment relation must not be exempt from tax under the Non-Resident Income Tax Act.

This is to avoid situations in which income is not taxed at all under the rules on taxation of income from work contained in the Income Tax Act, the Non-Resident Income Tax Act and what is generally article 15 of the Conventions on Double Taxation.

6.- Foreseeable remuneration under the employment contract in each of the tax years in which the special system is applied must not exceed the sum of 600,000 euros a year.

This quantitative limit was introduced for periods beginning in or after 2010, with transitional rules for employees who had opted for the system prior to 2010 and for whom the period of application of 1+5 years was still running.

The limit raises a host of issues which we will try to deal with in the following chapters, such as what happens where the limit is broken in the third year, or how the system can be applicable to income of 599,000 € but not to income of 600,000 €.

2.- Formalities for the application of the System

For a Spanish tax resident to opt for the System he must give formal notice using form 149 which must be presented within 6 months of the date of commencement of the work as recorded for the purposes of Social Security in Spain or the foreign communication of continuance of contributions.

It should be pointed out that the option remains in effect until the taxpayer decides to withdraw from the system, the withdrawal having to be notified using form 149 before the beginning of the tax year in which the withdrawal is to take effect, in the months of November or December.

If the taxpayer withdraws he cannot opt for the system again even if he is still within the period of 5 years from the acquisition of Spanish tax residency.

If there is breach of any of the requirements the taxpayer is excluded from the System in the tax year in which the breach occurs.

3.- Content of the Special System for Inpatriates

Spanish tax residents who meet the requirements under the regulations and who have formally opted for the application of the Special System for Inpatriates may pay tax as non-residents only on income with a Spanish source as set out below:

• The taxpayer will retain his status as a Spanish tax resident.
• Income obtained from Spanish sources will be taxed in accordance with the rules for non-residents, thus avoiding the progressive rates of resident Income Tax.
• Income from foreign sources will not be taxed in Spain under the system.
• Careful attention must be paid to the repercussions this may have in the context of the application of the Conventions on Double Taxation. This will be looked at in chapter 3 of this cycle.
• The various income flows will be taxed separately for each total or partial accrual of income subject to tax, even if they are all settled at the same time.
• The taxpayer must present a declaration for Wealth Tax in accordance with his liability to pay this tax on his Spanish assets.
• The declaration is made on form 150 within the time and with the formalities laid down for Income Tax declarations, form 100.

4.- Final considerations

As we will try to point out in the coming chapters the System for Inpatriates contained in Spanish tax laws is particularly difficult to reconcile with other domestic and international tax laws. This necessarily takes us on to an individual examination of each case which may be encountered, taking into account the overall position of the taxpayer.

«Beckham’s Law» has often been applied automatically without taking into account the taxpayer’s particular position, causing significant damage due to a failure to take into account his specific needs. This has meant that the apparent advantages of the System for Inpatriates have become hurdles difficult to overcome in the context of international tax planning.