Spain: Taxation of the Remote Service Provider

 

1. What are the different categories of remote service providers operating in the country?

The remote service provider being an individual (not legal entity) that is located in Spain and is working for foreign companies, may have the following different categories.

1.1. Employee.

1.2. Spanish employment contract.
In this case the Employer will be the foreign company. According to Spanish Law, non-resident companies must be registered as an employer in Spain before the Tax Administration and before the Social Security. The registration before the Tax Administration is needed as the foreign company must declare and pay the withholding income tax referred to the salary of employee. The employee and employer must be registered at the Spanish Social Security as the contributions to the Spanish Social Security are applicable.

1.3. Other country employment contract for legal entity located outside Spain:

a) For a limited period of time.
It is an usual situation within European Union. Employees from an EU-Country are sent to Spain for a limited period of time maintaining the employment contract with the foreign employer and keeping on paying the Social Security in the other European country for a maximum period of two years.
b) For an unlimited period of time.
In this case, there are some issues to consider. Social Security and the Income Tax over the salary must be paid in Spain. Spanish Employment Law will be compulsory applicable in the terms of the EU-Regulations about applicable Law in contractual relationship. In this case, the employment contract submitted and prepared based on another Law different to Spanish Law must be reviewed.

1.4. Self-contractor.
It is important to remark on the two main circumstances that may involve such a legal relationship between the service
provider located in Spain and the company or companies for which the services are rendered.

The two main circumstances are:

• Working for one company.
• Working for several companies.

 

From Spanish Law perspective, we have to analyse whether the circumstances lead to a fake commercial relationship or to a real commercial relationship between the self-contractor and his/her customers. In case that one contractor is working for a one single company abroad, who is defining and organizing his/her time and giving binding legal instructions from the Spanish employment perspective, it might be understood that it is an employment relationship rather than commercial relationship. In this case, it is very necessary to have legal advice to find the best way to protect the interests of the employer and employee, depending on who is in the client.

 

2. Under what circumstances or situations does a remote service provider become a resident in the country?

According to the Spanish Income Tax Law, there are some test and rules to consider.

2.1. 183 days rule.
An individual is resident in Spain when he stays in Spain for a period of over 183 days within a fiscal year.
Sporadic absences will not be considered. Therefore, temporary trips outside Spain will not be considered as days outside Spain for the purposes of this rule.

2.2. Economic interest rule.
A natural person is deemed to have his habitual residence in Spain when the main base of its activities or economic interest maybe located in Spain, either directly or indirectly

2.3. Family rule.
A Natural person will be presumed to have his habitual residence in Spain when his/her partner (wife/husband others...) and himself/herself has not been legally separated and/or his children are under age and residents in Spain.

2.4. Tax treaty rules.
In case of conflict with rule of the State that may consider the same individual as a resident for the purposes of its domestic law the following tie breaker rules will apply:
a) Permanent home available
b) Centre of vital interests
c) Habitual residency
d) Nationality
e) Mutual agreement

 

3. How is income tax assessed on a remote service provider who holds residency status in the country?

3.1. Normal tax regime
a) Employee.
Employee will be taxed in Spain for the salaries and also for the white income, considering that the employee is a tax resident in Spain. Very few expenses can be considered to assess the taxable income base.

b) Self contractor.
Self-contractor will be taxed for the profit of his/her activity. This means that he/she will be able to deduct expenses in order to assess the taxable income base.

3.2. Beckham Law Regime
The remote service provider located in Spain can apply for the Beckham Law Regime, subject to certain requirements and conditions that would result in the application of this regime rather than the normal tax regime.

3.2.1. Main aspect of the taxation under Beckham Law Regime.

• Favourable tax regime applicable to foreigners who come to live in Spain. It was introduced by Royal Decree 687/2005 that amended the Personal Income Tax Law.
• Application of non-resident income tax during the first 6 tax periods. That means that only the Spanish source income will be submitted to taxation. Other income that is generated outside of Spain is not submitted to taxation.
• Fixed taxation of income obtained in Spain of 24% up to €600,000 and 47% from that amount.
• The name comes from the footballer David Beckham because he was the first to benefit from this law.
• The regime has been subject to relevant modifications with Law 28/2022, of December 22, for the promotion of the ecosystem of emerging companies.

 

a) Which are the requirements?

• Not having resided in Spain during the 5 years prior to moving to Spanish territory.
• The displacement to Spanish territory must occur as a consequence of:

1. An employment contract, except professional athletes (including employees who travel to Spain to work remotely).
2. The acquisition of the status of administrator of an emerging company, except that the entity is classified as patrimonial and the administrator has equal to or greater than 25% of the participations.
3. Carrying out in Spain an economic activity classified as entrepreneurial (understood as an innovative activity and/or with special economic interest for Spain + favourable report issued by the Empresa Nacional de Innovación S.A.).
4. Carrying out an economic activity in Spain by a highly qualified professional who provides services to emerging companies or carries out training or R+D+i activities, receiving a remuneration that together represents more than 40% of business, professional, and personal work incomes.

• Not obtaining income through a permanent establishment located in Spain, except in the cases of economic activity qualified as an entrepreneur or the performance of an economic activity by a highly qualified professional.

 

4. How is income tax assessed on a remote service provider who holds non-residency status in the country?

In order to answer this question, we consider the following situation referring to an individual who is the remote service provider.

• Residence in Spain.
• Less than 6 months.
• No family rule applicable, no family in Spain.

 

Tax Treaty. We should consider the applicable Tax Treaty between Spain and the country of tax residence of the individual.

In principle, the salaries obtain by the company will be not taxed in Spain provided that they are paid by the foreign company and not by a Legal Entity located in Spain.

In case of the self-contractor, the consequence will be the same, no taxation in Spain. However, we have to consider the issue about the permanent establishment or the fixed base according to the Tax Treaty.

If the material means and activity rendered by the self-contractor in Spain fulfil the requirements of a permanent establishment or fixed base in Spain, the remote service provider pays taxes in Spain concerning the attributable profit to permanent establishment or the fixed base located in Spain.

 

5. In what scenarios can a remote service provider inadvertently establish a permanent establishment for a foreign company in the country?

In order to assess whether the circumstances concerning the activity of a service remote provider in Spain may constitute a permanent establishment in Spain, we have to examine the main aspects of the permanent establishment.

5.1. Place of business clause.
Place of business: The home office can be considered, in principle and without prejudice to particular cases, as an installation where there is an office and material means suitable for the worker to provide his/her services.
Permanence. The worker is in Spain permanently where he/she has his/her centre of life interests (Article 4 OCDE Trax Treaty Model). In this regard, that requirement may be considered fulfilled.
Fixity. The worker is in a fixed place in Spain. Home office may fulfil this requirement.
Power of disposal. In most of the cases it may not be fulfilled, see below.
Main activity. This is one of the main aspects as it is no clear that this circumstance through the services provided by remote worker may be fulfilled. See below.

5.1.2. Power of disposal over the worker's home.
The OECD (Update guidance on tax treaties and the impact of the COVID-19 pandemic, 21.1.2021) and the Spanish Tax Administration (Spanish Tax Ruling 18.1.2022) have established certain criteria.
The company will not have power of disposal and therefore a PE will not be constituted in the following cases:

• The employee has requested the transfer to Spain.
• The employee has an office at the headquarters in another Country (in the mentioned case, in France).
• The company does not assume the housing costs.

The company may have the power of disposal in cases where the company relocates the employee and assumes the costs of the employee's housing.

5.1.3. Performance of a main activity by the tele-worker.
According to article 5.4 DTA OCDE Tax Treaty Model, the exercise of auxiliary activities will not determine the existence of a PE. The criteria to be able to base the absence of a main activity would be the following.

• Absence of clients in Spain for the non-resident company, so it can be argued that it does not operate in Spain, see the criterion of the Spanish Tax Administration (Spanish Tax Ruling 23.12.2022).
• Market served by the teleworker. In many occasions, the teleworker serves markets other than Spain such as Italy, France, Portugal.
• Global activities of management or direction for the non-resident, normally European, Group.

In any case, it is necessary to pay attention to the assessment that the Spanish Tax Administration may make of the circumstances.

5.1.4. Agency clause.
Contractual relationship. With the employment relationship, this requirement would be fulfilled.
Power to contract. This requirement normally is not met, since most teleworkers do not have the power to contract in name or on behalf of the head office, nor do they exercise it habitually. Although there is no case law on the subject, it could be understood that this power to contract refers to the operation of business in Spain.
Legal and economic dependence. This element is fulfilled since the employment and exclusive relationship entails both legal and economic dependence.

In conclusion, all circumstances must be reviewed to assess the permanent establishment risk and to minimize that risk in cases which are located in a grey area.

 

For further information, please contact:

David Elvira Benito, Partner

Bufete Mañá-Krier-Elvira, Barcelona

e: de@bmk.es

t: +34 93 4878030

 

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