[ HTJ Podcast ] US/SPAIN TAXES FOR EXPAT AND INTERNATIONAL ENTREPRENEURS – 22nd July 2021

VOICE OVER

This podcast channel is about you - successful international entrepreneurs, successful expats, successful investors. Sponsored by htj.tax

DERREN

All right, welcome everyone. We're going to start and it's the top of the hour. Thank you for joining us at htj.tax for yet another live stream, talking about our favorite topic, taxation. Yipee! Haha! So, with us this evening, we have the pleasure of having Ricky Gutierrez Becker, who has been hosting with us before, talking about Spain taxation. So please bear in mind that this is being recorded. So again, if you do not want your image to be recorded, just keep your cameras switched off. In addition to which, we are tax consultants, but we are not yet your tax consultants, which means that please don't take anything we say here as advice.

This is not legally binding advice. If you want advice to your specific situation that you need to act upon, then you'd need to legally engage someone. So treat this more as an education piece, or if you like, entertainment. But I just want to repeat that nothing we say here is legally binding. The things we say here should be construed as encouraging you to pay less than your fair share of tax in any jurisdiction. Okay. Quick disclaimer. So without further ado, I hand over to Ricky. Ricky, over to you.

RICKY

Yeah. Hi, my name is Ricky. I'm from, from Barcelona, Spain. From a tax and law firm here in Barcelona, Spain. And basically I'm going to be talking about Spanish taxes for expats. First. I'm gonna introduce a little bit about our firm. We are, as I mentioned before, we are a tax firm located in Barcelona, Spain. We are mainly focused on international clients, but we also do Spanish taxes, of course, and we are on the tax side.

Also, we take care of accounting, and we also do law. So we are involved on a lot of material. So first of all, taxes in Spain are a bit complex because you have to differentiate. It's kind of like in the U S that you have state and region tax. You don't pay the same taxes if you are located for example in Madrid or in Catalonia. Also we have three states, three comunidad autonoma, which are Navara, Pais Vasco and they do have, let's say, some special taxes.

They, tend to have lower taxes than in the other regions of Spain. The Spanish tax year runs from January to December. Unlike from other jurisdictions, like, such as the UK, that it goes from July to June. In Spain, we have a lot of double taxation treaties, which is very beneficial for us to avoid double taxation. And in our case, the most important taxes for individuals are the income tax return and the wealth tax.

One of the most important things in the beginning, is to know if I'm a tax resident in Spain, where do I have to pay my taxes? Well, there are three rules that you have to follow to see if you are taxed within Spain or not. First, we have the substantial presence test, which is very, very simple. If you spend more than 180 days in Spain, within a single calendar year, that means that your tax rests in Spain. The second rule is your center of economic interest, which is, your primary and professional activities are conducted in Spain.

And the third role is the presumption test. This test, it's whether your main interests are in Spain. Let's say that you have children and family, and they are living in Spain, and they depend on you. That might apply a rule that's saying that you are resident in Spain. We have to, it is very important to know that we have a rule, which is called the Korean temple. Before, always before we recommend before moving to another jurisdiction, we recommend doing some tax planning.

Because for example, if you move to a tax Haven jurisdiction, the Spanish government will, you will still be considered Spanish tax resident for the year that you moved. And that, for following years. Of course, to know if you're a resident or not, we can always go to the OACD model convention. And we can also see if we apply some of the rules of the OACD model convention, because maybe we are in between two jurisdictions and always the model will tell us in which jurisdiction we are, we are tax residents.

The income tax. Well, it's funny tax residents - they pay income tax on their worldwide income. While non-residents, they only pay tax on the income generated in Spain. The Spanish tax residents, they can get deductions on the expenses they have during the year. While non-residents, they cannot apply those deductions.

The percentage for non-tax residents in Spain is 19% if you are in the EU. And 24%, if you in are the rest of the world. You have to know that dividends capital gains and interest will always be taxed on 19%, whether you are EU or non-EU. And royalty income can either be taxed at 19 if you are EU, and 24, if you are from outside of the EU. The Spanish income tax is separated in two categories- you have the general income and the savings income.

As mentioned before, there are regions like Navara and the Basque country that they have special regimes. And one of the things that people should know is that Spain, the income tax can go up to 54%. 54 should be the highest. The highest percentage is in, in Catalonia. In the region of Catalonia, it's where you pay the highest income tax. In Madrid, it's around 52%. It also depends on the, on the income you were.

First, we're gonna go a little bit deeper on one of the sides of the income tax, the savings part. Inside of this part, we have all the interest that people have from, from savings, dividend payments, income from life insurance policies, income from annuities and gates made from the disposal of other assets. Since 2016, the rates on the savings part go as follows - income up to 6,000 it's 19%. From 6,000 to 50 to 21%. And income over 50,000, it's 23%. The general part is income from employment, pensions, income from rent. And the percentage goes as follows.

As mentioned before, and in the Spanish income tax, you can have a personal allowance system deduction. Only tax residents can apply those, those deductions. If you are not tax resident, you will have to file another form. We'll just call it the form 2 10. Some of the allowances are for people that are over 65, people that have children living with them. They can apply for personal allowances deductions. If you donate to charity, you can apply for some deductions.

There are several types of deductions that you, that you can apply. Well, here we enter another big tax in Spain. Here, when you file your income tax, you file both the income tax and the wealth tax. The wealth tax, it's basically designated for people that hold significant worldwide wealth. So very wealthy people are the people that are going to be submitting this tax. In Spain, all the assets after tax allowance, you have to declare all the assets of the tax allowance of 700,000 euros.

I mean, you can see the, the amount is pretty high. For example, in Catalonia, the tax allowance is lower. It's 500,000, which is a bit unfortunate. But for your primary residence, people, they do have an additional 300,000 tax allowance. I mean, all these amounts are the sum of all the wealth that you own and all the properties. It's not just for one property you have. It's for all.

So if all the properties that you own are over 700,000, you will be required to file this, this tax. Well, this tax rate, it goes from 0.2% to 2.5%. And something that people should know is that in Madrid, there is no wealth tax. But the current government, they are trying to change that. And they are trying to apply wealth tax in Madrid. This tax is a little bit, there's a little bit of controversy because some of the politicians here, they want to, they want to ban this tax.

They want to take it out. But some of the other political parties, they want to implement it. They want to keep it. Now, here comes a form that is very important. It's called form 7 20. It's an overview of the individuals' worldwide assets. It's a form that is for people that are from outside of Spain. And they become tax resident here in Spain. The year that they become tax residents during January and in April, they have to file this form. As mentioned, it's an overview of the individuals' worldwide assets.

And here, you have to declare all the assets that you have that are worth more than 50,000 euros. I mean, here, you don't pay anything. You just need to declare and state which are the assets that you have that are above 50,000 euros. For example, if you have a bank account that it's, and you have more than 50,000 euros, you will have to declare that. A lot of people that come here to live and retire, they don't know that they have to file this form. And you can incur really high penalties if you don't file this form. Now, we have property tax. Only property here in Spain, you will be subject to some community taxes, such as the AB, which is the ----

These taxes are not government taxes; are taxes from each state. It depends on whether you're in one city or whether you're in another city. You will be taxed differently. This tax applies to both residents and non-residents. You also have rubbish collection tax. And of course, when selling a property, you have transferred tax.

Capital gains. As mentioned before, for non-residents, capital gains tax here, it's pretty straightforward because you have a flat rate of 19%. While for tax residents, you start at 19% for the first 6,000 of profit. And it goes up more to 23%, depending on the profit that you're in.

Corporate income tax. In Spain, nowadays, the corporate income tax is 25%. There have been some rumors that they were trying to increase it to 30%. But at the moment, it's 25%. Newly formed companies, they pay 15% for the first two years. And the tax year goes from January to December.

Of course you can, you have the chance to change that if you want. And the income tax is due July 25th of the following year. So now, we are in the income tax season. So it's a pretty, pretty, pretty busy season.

Inheritance and gift tax. This is a tax that is a bit complex because it depends on each subject. And on each case, individuals are subject to tax when transmitting or gifting assets. Tax residents, of course they are taxed on the worldwide assets.

So if you are a taxed within Spain, and you are giving a property that is outside of Spain, that might be probably, that might be taxed in Spain. Non-residents, they only pay for the... they're only tax for the assets that they have here in Spain. And of course there are some deductions and reductions based on the degree of -----. Now, when we come to a special tax regime for foreigners, which is very known, which is the Beckham law. This law enables foreigners who want to move to Spain, that instead of becoming tax residents, they kind of become non-tax residents, but they just pay a flat fee of 24% instead of going to a progressive tax on their worldwide incomes. Then 19% to maybe, to 54%.

The flat rate, it's up to an amount of 600,000. And 45%, over 600,000. I mean, this law was used a lot by a lot of athletes. That when they changed the amount, I mean, a lot of people stopped using it. You can apply for this law the first six years you're in the country. And there are some requirements. For example, the expat has been resident in Spain during the past 10 years. The foreigner must have a job contract, and this job contract needs to be signed by a Spanish company.

And if it's a director that comes here, the director can possess more than 24% of the company. And of course, the core of the business and the professional activities must be in Spain. And that's about it. If you have any questions, I'll be more than glad to answer them.

DERREN

Wonderful. Thank you very much Ricky. Appreciate it. So please, as Ricky has said, and as Hannah has typed in the chat box below, if you have any questions, feel free to type them in the box below. Some of you did email your questions ahead. Thank you very much for doing so. And we'll now go through them in the order in which we received them. So for those who are watching outside of zoom, well, for those in zoom, well, type them in the chat box. If you came in early, you may be able to see it otherwise we can just read them out.

So the first question is... I'm an American living in Spain. I will move back to the states for two years for work. Then come back to live in Spain, hopefully forever, forever in quotes. From a strategy perspective, when it comes to investing for retirement, et cetera, would your recommendation be to invest here in Spain or invest in the US knowing the long-term, I will need the money here in Spain. I believe there will be tax implication in both situations. Ricky, comments?

RICKY

Well, I mean, basically, it depends on the situation. I mean, if, for sure you're going to be retiring in Spain, I guess I would recommend having or doing the investment here in Spain. But it also depends on whether you're going to invest in, I dunno, depending on the investment that you make. Because maybe for example, it is, maybe the investment is not taxed in the US and it's taxed here in Spain, I guess it depends on the situation. For that, I think I mentioned it during the webinar, before doing anything normally, or transferring to other jurisdictions and try and spring back, we recommend our clients to sit with us and do a little bit of tax planning. So, we can plan everything before making any movements, and we can have everything under control. I mean, that's my recommendation.

DERREN

Yeah. I, 100% agree with that. It really depends on the nature of the person, what their appetite is for risk, et cetera, et cetera. For what their situation is. And we, unfortunately, I know you provided a lot, but it's really not enough to make a determination. So I'll reduced meds. You're probably going to need to sit with your preferred financial and or tax professional and talk through what your objectives are, in terms of financial planning a retirement.

RICKY

Yeah, because for example, I mean, if this person is wishing to buy a property, of course, I would say buy it in Spain because you can use it as your primary residence. You can have, maybe you can have some deductions from that. Depends. Of course it depends on the investment and the financial situation and everything. I mean, we tried to. There's, it's not like mathematics, like two plus two is four. Each case is different. And of course, we need to study it first before giving a perfect answer.

DERREN 

Absolutely. Moving on to question 2. if you become a legal Spanish tax resident in 2021, would you have to file 2020 or 2021 for the Spanish tax year? Ricky?

RICKY

No. I mean, you, if you become tax resident in 2021, of course you will file taxes for the 2021. And, you will have to submit them in 2022. The income tax in Spain, it's still the 25th of June of the following year that you'll be in touch with them. So in that case, would be in 2021, 25th of June, you will have to submit your, your taxes.

DERREN

Okay, perfect. That was relatively straightforward. Question three, I've been in Spain for almost five years now and never filed taxes. But the person is unclear whether they didn't file taxes in Spain or the US. But anyway because I had no taxable income and no W2's to present. Is that illegal? Furthermore, the IRS allows me to stimulus checks that seemed to have got lost in the mail. Can you tell me what I legally have to do if your service could help me? Thank you very much. Do you want to comment on that first, Ricky?

RICKY

A lot of people that come to us, they haven't filed taxes. I mean, if you haven't, if you're a Spanish tax resident, no. Well, of course you are required to file taxes. But in that case, we would, if you haven't had any income coming from Spain and depending on the income that you had in the US, maybe it's on some of those incomes are exempt in Spain. Maybe for that case, you are not required to file taxes in Spain. We would need to know which incomes are we talking about? If we are talking about pensions, we have to differentiate between public pensions and private pensions

Public pensions - in our case, they are not taxed in Spain. They are only taxed in the US. But private pensions - they are taxed in Spain. So, it depends on the incomes. But maybe, it was right that you didn't have to file tax in Spain. I mean, it depends on the incomes and everything.

DERREN

100% agree with that. And I believe the same would apply with the US. Because the person who's asking the question says that I had no taxable income. So it'll be, we'll be curious to understand what type of income they received, that they deemed as not taxable. Because with the US, I mean, depends on their filing status as well. And there are, for example, married, filing separately, the threshold is actually $5. So more than $5, a tax return is due. So, you know, if, but if they got zero, they got no income, then maybe they got a gift. And if they got a gift, a gift return might be due. So, you know, we'd really need to take a deeper dive to understand, well, how have they been eliminated? And therefore, what is the source of the money that they're using to survive. And indeed, if it is really not taxable, so correct.

Okay. Moving on to question 4. I think this is more of a political statement than a question, but, you know, out of fairness, I'm still gonna read it. Why should digital nomads pay tax? They don't have the same benefits as country residents. Another scam tax scheme to bleed people dry. Well, you know, for those who don't, ah, unfamiliar with the term digital nomad would be someone who is more or less location independent, and they are traveling around. So they consider themselves not to be resonant in any one place.

anyway. So my perspective has been, and I think I've mentioned it on other live streams that one needs to consider, not just taxation, but also banking. So while, you know, while this person cannot be a US person, because if they were a US person, as in a US citizen or green card holder, so permanent resident of the US, then they should know that they are subject to taxes on their worldwide income, regardless of where they reside. So from an IRS perspective, the IRS sees very little difference between Madrid and Miami. The IRS expects a return regardless.

But let's assume that they're not a US person. So they are not subject to citizenship-based taxation. As they put it. Then one would need to consider banking. So, even though they may be moving frequently, so they're not deemed to be tax resident anywhere. They're presumably earning money, unless they live off a trust fund, which is another conversation. But let's say that they're earning income in some way, shape or form. If it is that it's not being taxed anywhere, unless they're keeping it in cash, it's probably going into a bank account. And at any point in time, that bank, reserves the right to question, how is this money being earned? Now anyone can show invoices because give anyone five minutes in Microsoft Excel, they're going to find invoices, right?

But one thing, some banks may accept it. Some banks may not. But one thing that all banks respect would be a tax return. Because it's a government document, and it evidences that this money has been legitimately earned and you signed it's under some sort of penalty of perjury. And therefore the bank feels a measure of comfort. So, to the person who wrote this, I, you know, I would just respectfully suggest that they consider the banking implications. Because we have had clients that were digital nomads, and they're traveling around, they earn money and they bank it in, let's say an emerging market jurisdiction. So not Europe, not north America.

And at some point in time, they wanted to return to the developed world. And they found themselves locked out, even though they had, they're citizen of a given European country, for example, Canada or whatever, they were unable to remit the funds because they couldn't prove that they were legitimately earned. And these we've seen it on several occasions.

So I leave that. Then I move on to question five. Hello, how are you? We're fine. Thank you. Here's some questions for the seminar. I own rental properties in an entity that pays me a salary. What would be the tax rate for my W2, 10 99 incomes? Or would the tax be based on the income of the entity? If I sell the property while living in Spain, I understand the game would be tax. Is that correct? If my income is around 100k, am I really taxed at 45%? Ricky, you know, tackle it first?

RICKY

Well, I mean, regarding the sale of the property, if you’re a tax resident in Spain, your tax on your worldwide income. I mean, even if the property is outside of Spain, if you have a gain on that property, you will be taxed on that. And of course, yeah, if your income is around a thousand, a hundred thousand euros, yeah. It's totally correct that it can be 45% or even more depending on the region that you are. Yeah. As I mentioned, you can go, to even higher - to 54%.

DERREN

Okay. So I'll comment on the first part of the question. So, first of all, we need to know how, you know, you said that you hold your rental properties in an entity, what type of entity, right. If it's an LLC, then it's from a tax perspective, transparent. So if it's a single member, LLC, it's going to be on your shed you see. If it's a multiple member LLC, then it's treated as a partnership. So you're going to get a K 1 and the K 1, will feed into your schedule E. So B on your personal return. Whereas if it's a C Corp or a corporation, perhaps in another jurisdiction, then it files its own tax return.

And either that you take the money out, as you said, as a salary, or you have the option of pulling it out as dividends. So I mentioned that, because some people say that they get a salary from an LLC of which they're a member. Technically the LLC can give you a salary. If you're a member, it gives you a distribution. And that distribution is reflected in your personal tax return. As I mentioned, in addition to which it makes both your self-employment tax, which is additional. So in addition to your income tax and whatever your marginal tax rate would be, you'd be paying the 15.3% self-employment tax. Right? So to answer your question, it really depends on the structure. So we would need to understand the details of the structure inside out in order to, you know, give an opinion as to how it going to be taxed. And Ricky answered the latter part, which will be the consequences in Spain. So I hope that helps if not, you know, to find us.

Moving on to question 6, scrolling down. I've been living in Spain for years and have not been filing US returns. Would I qualify for the streamline? Now, for those who are not familiar with streamline, I'll explain a bit of a context to this question. When someone is outside of the US and they have not been 100% compliant with their US tax responsibilities, there are number of options, but generally speaking, there are three.

There's, well, there's do nothing and just go forward. There's streamline. And there's a voluntary disclosure, right? We never advocate do nothing or just go forward, because the IRS themselves admitted clarity, that they don't like it. And they are on the lookout for returns that just pop out of nowhere and there's no history. And, you know, so they will pick on you. They will find you. And if you did not elect something like streamlined, you open yourself to the full weeks of penalties and interests. And penalties are both civil and criminal. So, no tax professional, at least in our ecosystem would ever recommend that. So we put that to one side.

So the difference between streamlined and the voluntary disclosure program? t hinges on the concept of willfulness. Now, the US is not a civil law jurisdiction, like Spain being a common law jurisdiction, which means that in addition to the letter of the law, the tax code, we need to pay attention to case laws. So case law is super important in order to do US taxes. So, I say that because the distinction between a candidate for streamlined and a candidate for the voluntary disclosure program, it used to be an OVDP offshore voluntary disclosure program. Now it's just a disclosure program under the way it was previously the IRS manual.

But anyway, the difference between the two lies around the legal concept of willfulness. Now, willfulness, the definition that we derive from case law, particularly a case called Cheat versus the United States. I think that's like the pivotal case that you would see tax professionals citing, in trying to explain or understand for themselves the definition of willfulness. So willfulness is defined as a voluntary, intentional violation of a known legal duty. And intent of voluntary, intentional violation of a known legal duty. So what does that mean in reality? It means typically someone has made or taken decisive steps to conceal their income.

So evidence of that, that we would look for would be like, for example, number of accounts, hold mail addresses, using nominee structures. So they evidence some level of sophistication and there was intent to evade or yeah, basically evade paying taxes, right? So, you know, this is a very general, very high-level discussion right now. You'd need to take a deeper dive with your chosen tax professional, but essentially, someone who qualifies for streamline has been non willful and then non-compliant. So their non-compliance doesn't have that evidence of that intent, that, and that intent substantiated by that evidence.

So, that's what we are talking about. In other words, to answer your question, we'd need to understand the facts and circumstances of a case. We need to see the fact pattern. And if it is, that you have been non willful in your non-compliance, then definitely we would agree that streamline is right for you. Everyone prefers streamline because you avoid penalties and the penalties can be pretty aggressive, right? So you pay interest on any taxes due, but you avoid penalties, which makes it attractive. So the look back period is three years. So you do three years with due date has already passed. So even though you haven't filed a return for five or 10 years, the IRS just wants to see the last three years and six years for F boss foreign bank account reports.

And there's a statement that is involved and it's all packaged incentive. So to answer your question, do you qualify? It really depends on your facts and circumstances, and whether you can be considered to be non-willful and your non-compliance. Hope that helps. You need to speak to a professional, please. I really recommend it.

Moving on to number 7. This is a lengthy explanation, but I will read it in full. I'm, a dual citizen, US, and Finland, living in Spain. And self-employed, self-employed by an American Chinese company. I'm curious to know the best way to file taxes in the US, so as not to owe more money than I've already paid in Spain. I pay taxes here in Spain, and I know there's a document available to download application for tax residents, a tax certificate. A solicitude. My Spanish is awful, right? Tobi Dario de Residencia Fiscal. It should lay out that information for the IRS. Okay. So in terms of US tax.

RICKY

Yeah. Sorry. No, it's a certificate stating that you're a tax resident in Spain. Just that.

DERREN

Okay. So in terms of the best way to file taxes in the US so that you don't owe more money than you've already paid in Spain. Most people, I know it really, really depends, but most people who are filing and they're paying taxes in the worldwide income in Spain, don't owe taxes to the US because of the two jurisdictions. Spain tends to be higher. As, as Ricky pointed out, they go up, Spain goes up to 54%, the US tops off at 37% in terms of individual income tax. So it does happen, but it's unusual that after filing your full Spain tax return, you're going to go to the US. But, if you do remember that there is also foreign tax.

I mean, aside from the foreign tax credits, there are treaty positions that we can take, depending on the nature of the income. As to your document, that you're tax resident. So, you know, you're claiming that your center of life is really Spain, and you have no connection at all to the US and therefore, you're invoking, I guess, a treaty position, not to file any taxes with the IRS. It is possible, but you know, we'd need to, you need to sit with a tax professional and make sure that you understand the clauses in the treaty that allows someone to take such a position, and whether it's in your interest to do so.

So it is. So, first of all, my first response is you can file a tax return, and it is unlikely that you're going to owe anything because of Spain being a high marginal tax rate. If it is, you do decide to take a treaty position, you should seek advice before doing so.

RICKY

Okay. Yeah. I mean. Here to add something. Normally in these cases, you would file taxes first in the US, because of your nationality. And then if you pay something there in the US, you will apply the double taxation treaty while you file your taxes in Spain, and you will be able to deduct, normally you will be able to deduct what you paid in the US. In these states, you don't pay twice for the incomes that you receive.

DERREN

Yeah. You know, you know, thanks. Thanks for that, Ricky. You know, that's an important point. I mean, people get nervous about the idea of being double taxed. It's rare. Once you have a tax team that knows what they're doing, it's very rare to be taxed twice. If it does happen in the extraordinary circumstances, but typically, no, it does not. So, it's nothing to worry about. Once the person knows what they're doing, how to apply foreign tax credits and how to invoke the treaty when necessary.

Okay. Moving on. Next question. How do I go? Okay, let me do it. Okay. All right. This is a person that same person continuing and then the question, how do I go about that come 2021 tax season, which I guess they're thinking in 2022, when they have to do the 2021 returns. I think we've kind of answered that Ricky, you know, you file. I mean, you can file both. It's unlikely you're gonna be paying taxes. You're not going to be double taxed because we have both foreign tax credits, and we can involve the treaty when necessary.

Or if you want to take a treaty position that you, you know, you have your sense of life in one place, and you don't want to follow your train elsewhere, and you want to get that certificate. You can apply for it. It's an application process, and you should want it. You would want to sit with a tax professional to, to make that application.

RICKY

Yeah. I mean, here, the certificate, the thing that people need to understand that here in Spain, your taxed based on your tax residency. While in the US I mean, of course your taxed based on residency but you are taxed based on your nationality.

That's... A lot of people don't understand. Why do I have to file taxes in both places? The US - it's a bit special with that. And US nationals have to file taxes because of your nationality. I think it's the only country that does that.

DERREN

Yeah. The US shares that you need distinction with your rich area - a country in the horn of Africa. Right. So, yeah, so it depends who's on the roll. Right? Go figure. Okay.

So I'm scrolling down. Okay. Well, the question from Casiano. I am an American, sorry. I'm an American living here on a non-lucrative visa. All of my income is in the U S. I've just realized that I have spent two years here as a tax resident and did not know that I had to file. So I'm guessing, you did not know you have to file in Spain. Will I face severe penalties? What should I do? Ricky?

RICKY

Well, I mean, yeah, later he said that he filed taxes in the US. I mean, it's similar to what we mentioned before. Of course, if you're, well, we had a lot of some cases here that people that come with the non-lucrative vis, they think that, okay, I'm on the non-lucrative visa. I don't have to pay taxes in Spain. That's no problem. No. Something it's the visa. And the other thing is a tax residency. And as I mentioned before, if you are more than 183 days in Spain, you become taxed with them.

Based on that, of course, you would have to pay taxes on your worldwide incomes. You mentioned that you don't have any income from Spain. That's definitely fine. That, we would have to check if the incomes that you've been receiving from the US, if they are taxable in Spain or not. As I mentioned, if they are not taxable in Spain, then you're completely fine. You don't have to pay taxes that, yeah. But, it depends on the income that you have in particular.

DERREN

Okay. That is great. So, sorry. What about the latter part of the question? Will this person face like severe penalties?

RICKY

I mean, for not filing the income tax, it will depend on the income that he didn't declare. Normally, I think it can go up to 20% of what you owed to the Spanish government. But we would have to check that. I mean, of course, if the income they declared is very high, I mean, the percentage is 20% of what you didn't pay. It should be pretty high. It depends.

DERREN

Okay.

RICKY

Yeah. I mean, all the other things that we recommend, I mean, nowadays the Spanish government, they can, and for sure, other governments as well, they can know almost everything because they check bank accounts. They check out. But, in some cases, I mean, depending on what they owe and other stuff. There's a lot of tax residents, Spanish tax residents, and the government cannot know everything. In some cases, it's better just to not file and file the next year as if you were tax resident.

But of course it depends on each case. And if it's really complex or not. We would have to study of course, the situation and make a decision before doing anything.

DERREN

Okay. Perfect. I hope that helps you make a decision. So given the high, you know, the high interest penalties or whatever, it's best that they move pretty quickly. Okay.

Next question. A US citizen, oh, well, we always get this question when we do webinars. A US citizen who's a resident in Spain, received retirement income from an individual retirement account and a non-government pension plan back in the US. Are there any tax treaty benefits regarding the retirement income? Ricky, can you want to handle that one too?

RICKY

Well, as I mentioned, the incomes that are basically exempt in the US, I mean, of course we would have to check that - that our public pensions. When we talk about public pensions, these are pensions that are given by the government. So if you've been a government official, all the pensions that you received are public pensions. If the pensions come from the private sector, they will be taxed. So, it depends on that. Iif it's not a public pension, you will be taxed in Spain for sure.

DERREN

Yeah. So, we get, as, you know, as I kind of intimate, we get this question all the time, so much so that, you know, I actually drafted with Ricky's help, like a paper, and we have it on htj.tax which kind of goes into detail on everything that Ricky just said, but essentially, yes, it may be taxed. But there are and to your, to the question, as you have written it. Yes, you may be able to claim some tax treaty benefits, but it becomes a bit involved. So in other words, you'd have to pay the taxes to Spain because it's, oh, it's Spain. But we'd be able to resource the income using certain forms, form 11 16, or whatever on your US tax return.

In order to pursue that, you can get the foreign tax credits and apply it to reduce your overall income. So to answer your question, yes, it may be subject to tax, but yes, at the same time, we can invoke the treaty to work in your favor to reduce your role, your tax burden. So have a look at the people that we have in htj.tax, and you can reach out to us if you have any further questions on that because it is pretty complicated and it's perhaps the most frequent question we get asked. Okay.

RICKY

Yeah. And I think with this, we cannot solve the last question, which is the social security considered a public pension, and therefore shouldn't be taxed in Spain. It depends on whether it comes from the government, or it comes from the private sector. If it comes from the private sector, then no, it's not considered a public pension and it is taxed in Spain. And we had a case in our office, this person, he only received income from the US, and he has a pension from the government. And he also received social security from that pension. He was a US official.

And because of that, he didn't have to file. He wasn't required to file taxes in Spain. Yeah. We have to distinguish if it's public or private. And from that, we will decide here, there, you have to... It is taxable or not.

RICKY

Yeah. And I think with this, we cannot solve the last question, which is the social security considered a public pension, and therefore shouldn't be taxed in Spain. It depends on whether it comes from the government, or it comes from the private sector. If it comes from the private sector, then no, it's not considered a public pension and it is taxed in Spain. And we had a case in our office, this person, he only received income from the US, and he has a pension from the government. And he also received social security from that pension. He was a US official.

And because of that, he didn't have to file. He wasn't required to file taxes in Spain. Yeah. We have to distinguish if it's public or private. And from that, we will decide here, there, you have to... It is taxable or not.

DERREN

Yeah. And that's an important point that Spain has a very specific definition of what a pension is. That may not necessarily accord with what the US defines as a pension. So, yeah, it is very nuanced is a key point to take away.

Okay. Next, next question. I missed the beginning of the session. I'm a US citizen based in Catalonia for 20 years. I file returns in both countries with separate tax advisors. How do you work? How do you work to do financial tax planning to optimize for two tax systems?

Well, you know, as, as we just explained, you know, in answering the previous questions. It can be done by two separate teams, but as long as both teams understand the principle of foreign tax credits and when necessary to where necessary, how to invoke the double tax treaty and the totalization agreement between the U S and Spain, it can be done. It's just easier when it's done by one team because the lines of communication are clear. And especially when that one team is familiar with international tax issues, as opposed to purely domestic taxes. When you do purely domestic taxes, you just don't necessarily have to get into stuff like tax credits and treaty positions as a normal course of your business. So, yeah. Ricky, any comments?

RICKY

I totally agree with that. I mean, of course, if you're working with two different teams, I mean, I would recommend that they are kind of on the same page, that they try, at least to know. Of course one is going to be more focused on the Spanish side and the other one, you know, on the US side. But it would be great if both of them, they know a little bit of the other jurisdiction. So when you send them the US return or the Spanish tax return, they understand a little bit of what they are, what they are looking at. And yeah, I would recommend that they are both on the same page and they understand how to of course, apply the double taxation treaties and the tax rates.

DERREN

Okay. Next question. Sorry. One more question. If I'm self-employed here in Spain and paying quarterly income tax, wouldn't it be better to file the yearly tax return first in Spain, and then submit that to the US. Do you want to comment? Ricky?

RICKY

I mean, I guess she's talking about the withholdings. Here in Spain, during the fiscal year, you have quarterly withholdings. These withholdings are deducted from the income tax at the end of the year. I mean it is how it is. There’re some people that they filed a ... it's called the form 0 36. And... they say that they don't want to, or that they are not required to file the form mix scope 130 for individuals.

And they just file the day, just one day income tax return at the end of the year. But normally, and also for businesses and companies, they pay quarterly withholdings. I mean, it is normal. And I think in other jurisdictions, in Europe, they also pay assessments. So…

DERREN

Exactly. So, you know, I was going to say that as well. So 100% agree. It's subject to withholding. So there's no reason to delay starting either of them. So you can, you know, once a year turns any beginning of the new calendar year, I normally advise clients let's get to work. You know, don't delay. You know, we can do every single form on the US return except the 1116, just with your income and your other deductions. So if it is, you know, anything is missing any final payment to me and had to make, to Spain, just one number on one part of one form. And you just plug that in and you're good to go. So to answer your question, I suggest on in both concurrently, and especially if you can finish both at the same time.

Okay. Next question. I'm in. Yeah. Okay. You're welcome. I'm in the process to become a dual citizen, Spain US, but my husband will still only be a US citizen. In the past, we have filed everything is joint. Would it be best to file separately based on the different status, or should it not matter?

I'm guessing you're talking about; I comment on the US side first. If you're going to be dual the, the US tax code has certain, takes certain positions. So you are rewarded. You get a slightly preferential tax treatment in terms of rates. If it is you filed jointly as opposed to separately. So all things being equal, you know, it's the same Latin Centerra's power of us, all things being equal, it is to your advantage to file jointly. And you're both US exposed. So unless there is some nuance in your situation, which of course you and your tax advisor will know about. Typically it's in a married couple's best interests to file jointly. Ricky, on a comment in Spain or jointly, separately?

RICKY

I mean, I guess in this case, it would depend on whether they are residents in Spain or not. Because... Yeah. If they are both residents in Spain, normally it is better to file taxes jointly rather than individual, because maybe one of the or either the husband or the wife, they have a lower income and they can reduce taxes for the other person. Normally, if you have the chance to file jointly, it is better to filing jointly. I mean, there was some, some case not long ago that the Spanish government, they said that in the new law that they wanted to prohibit or ban the jointly income tax, but then the European court, they said, that's now a lot of people, they, they stood up against that.

And they said, no, that they couldn't do that. And then the Spanish government came out and they said that it was a mistake, and they did it by mistake. So I have something kind of crazy. But yeah, of course I would recommend doing it filing jointly rather than individually possible.

DERREN

Okay, wonderful. So once again, both the US and Spain tax codes are good to each other. So on that note, thank you very much for your time. Those of you who've logged in, and thank you, especially Ricky for sharing your expertise and your vast knowledge on Spain tax for expats. Thank you for joining us. If you're on zoom, you can see Ricky's contact details down below. So feel free to reach out to him. If you have any further questions. Or to us if you have any questions on the US side. Everything has been recorded and it will be available on YouTube, SoundCloud, iTunes, wherever you get your favorite podcasts.

You're going to find this recording as well as on our website, which is htj.tax. Thank you very much, and we'll see you next time. Bye-bye.

RICKY

Thank You. Bye-bye have a good day.

VOICE OVER

Here are four ways we can help you.

  1. Sign-up for free webinars on US Expat Taxes and International Entrepreneur Taxes at www.htj.tax.
    2. Stream premium educational videos at www.htj.tax
    3. Contact us for tax optimization consult over Zoom. Number
    4. High Net Worth? We can quote for doing your US International Taxes Returns

Our books and upcoming events are available at htj.tax.

Please subscribe, like, share and comment below. Or email us at help@hjt.tax to engage us to advise on international tax or business matters.

Related Posts