Tax Withholding and Exemptions for Non-Residents in Spain
Withholding: Subjective and Objective Elements
Regarding the budget of the deductions, we distinguish between the subjective element and the objective element.
The subjective element refers to who the retainer is:
- Legal residents.
- Resident individuals engaged in economic activity.
- Non-residents with a permanent establishment.
The objective element is the income subject to withholding, derived by non-residents, and paid by one of the three retainers.
Regarding the tax base and the retention rate, the same rules apply in transactions with non-residents without a permanent establishment.
Exemptions
1. Equity
First, there is an exemption for dividends up to €1,500 earned by individuals residing in the European Union without a permanent establishment. Second, regarding investment funds, an exemption has been granted for refunds or transfers on Spanish markets if the performance is obtained by non-residents without a permanent establishment, and there is a signed double taxation agreement with the state of residence.
2. Transfer of Capital
First, there is no exemption on income derived from the transfer of capital raised by European Union residents without a permanent establishment. This is an exemption at the regional level of the European Union.
Second, there is no exemption for government debt yields obtained by non-residents without a permanent establishment.
Third, there is no exemption for income from non-resident accounts met by the Bank of Spain in foreign economic transactions.
3. Parent-Subsidiary Relationship
The assumption is a subsidiary company resident in Spain, which distributes profits to a parent company resident in an EU state other than Spain under certain conditions. The result is the exemption from taxation of the parent company and the exclusion of retention, all based on the Parent-Subsidiary Directive of 1990, updated in 2003.
Connection Points
In Impuesto sobre la Renta de No Residentes (IRNR), the concurrence of a foreign element determining territoriality is necessary, that is, a connection to Spanish territory.
- For income from capital, dividends are served at the residence of the entity, interests are served at the residence of the person who meets them, charges are served at the residence of the person who meets them.
- For capital gains, buildings located in Spanish territory will be considered, as will rights to be met in Spanish territory.
- For securities or obligations, the residence of the issuer is considered.
- For the performance of economic activities without a permanent establishment, the territory where the activity is carried out and the territory where the service is used are considered, i.e., the target activity (for example, if a British law firm issues a report commissioned by a Spanish company, and the report refers to Spain, the payments made to the British office by the Spanish company would be taxed under IRNR).
- For the performance of economic activities with a permanent establishment, the territory where the establishment is located is considered.
- Finally, for work performance, the territory where the work activity takes place is considered, as well as whether the Spanish government pays for it.