Article 7p, how earnings obtained abroad are taxed

With the geographic mobility that currently exists, many people receive work or other income abroad. These earnings must be declared when paying the Personal Income Tax (IRPF).

In this article, we will tell you how earnings from work abroad are declared and those derived from accounts or deposits in financial entities located in another country when the tax residence is in Spain.

When is a natural person considered to be a tax resident in Spain?

The first thing that has to be determined to know how the earnings obtained abroad are taxed is where the tax residence of the natural person who is going to declare personal income tax is located. It is understood that a natural person is a resident in Spain when any of the following circumstances occurs:

• That person stays more than 183 days during the calendar year in Spanish territory.
• That the main nucleus or the base of its activities or economic interests is in Spain, directly or indirectly.
• That the spouse is not legally separated and the minor children who depend on that natural person regularly reside in Spain. This third case admits proof to the contrary.

As a consequence of the foregoing, any natural person who does not meet the requirements seen above is considered a non-resident in Spain.

What must be declared in the Personal Income Tax?

To know what should be included in personal income tax, we must consider article 2 of Law 35/2006, of November 28, on Personal Income Tax, which establishes the following:

The object of this Tax is the taxpayer’s income, understood as the totality of their income, capital gains and losses and the imputations of income that are established by law, regardless of the place where they were produced and whatever the residence of the payer.

Earnings to be included in personal income tax

As a consequence of what is established in article 2 of the personal income tax law, the following concepts must be included in the declaration of this tax:

• Work performance. Earnings from work obtained abroad, including pensions or unemployment benefits, must be declared in Spain. However, article 7 section P) of the Personal Income Tax Law establishes an exception, according to which the income from work received for work carried out abroad is exempt from personal income tax provided that a series of requirements are met:
  • That the works are carried out for a non-resident company in Spain or a permanent establishment located abroad under the conditions established by law.
  • That in the territory in which the work is carried out, a tax of an identical or analogous nature to that of personal income tax is applied and it is not a country or territory that is considered as a tax haven. It is understood that this requirement is fulfilled when the country or territory in which the work is carried out has signed an international double taxation agreement with Spain, which contains an information exchange clause. The exemption applies to remuneration accrued during the days of stay abroad with a maximum limit of 60,100 euros per year.
• Income from movable capital. If, for example, you have bank accounts or deposits abroad, you must include them in the personal income tax return as income from movable capital. The obligation to include income from movable capital in the income statement occurs when the figure of 50,000 euros of profit is exceeded.
• Returns on real estate capital. It may happen that you have real estate abroad and that you rent or sell them and receive a profit derived from them. In this case, to determine the value of the property, the rules established by the Wealth Tax will be applied, and 50% of that value will be considered. 1.1% will be applied to the value, which will be understood to be the performance of the real estate capital that is included in the income statement.
• Income derived from business activities. In this case, it must be differentiated whether the activity is carried out through a permanent establishment or not. In the case of a permanent establishment, it must be taxed in the country of origin.
• Pension plans. In the event that contributions are made to pension plans abroad, they may be deducted from the income tax base, provided that these pension plans are regulated by European regulations.

What happens when the earnings have already been taxed in another country?

International double taxation occurs when taxes are paid twice for the same taxable event in two different places. This case occurs when, for example, a person is considered a tax resident in two countries. To avoid international double taxation, it is usual for countries to sign bilateral agreements in which bonuses and deductions are established. For example, it may be the case that a person makes the income statement in one country and deducts what he has paid for the same concept in another country.

The international double taxation agreements are intended to promote investments abroad, provide legal certainty and reduce the tax burden on investors. It is also important to note that country tax administrations cross information often to avoid tax fraud.

As a consequence of all the above, it is essential that, if you obtain capital gains abroad derived from work, bank accounts or economic activities, for example, you have the help of a tax advisor expert in international taxation to know where you have to declare and where you are considered to have your tax residence for income tax purposes.