When you stop working, it’s time to enjoy your pension. But what happens to your pension if you decide to retire abroad? To receive a pension in Spain as a foreign resident, you need to take into account a range of matters that can turn out to be quite complex.
Spanish pension laws are extremely complex, although this legislation is not applicable to Spanish residents receiving a foreign pension. In this case, you are covered by bilateral social security agreements. In Spain, the Social Security (“Seguridad Social”) takes care of social welfare matters.
One typical situation is migrating when you’re already receiving a pension in your home country. In this case, you need to know what to do to make sure you keep receiving your pension abroad. To start with, you need to submit a number of documents to the social welfare authority in your home country.
You may also need to demonstrate that you are still alive and entitled to receive the pension. Any hitch regarding this matter can result in a stoppage of the payments and can cause serious problems for you as an overseas pensioner.
Another complex situation entails when you have worked most of your life in your home country but now work abroad and plan to stay and live in this foreign country during your retirement. In this case, you need to calculate the most beneficial option according to the applicable international agreements for the periods worked in the two countries.
This situation can vary greatly and can give rise to very complex scenarios because of differences between the legislations of the different countries regarding the minimum retirement age, the minimum amount of years worked required, requirements regarding non-contributory pensions, etc. Ideally, you need to get professional advice when making decisions about such important matters regarding your working life.
Providing services remotely is, thanks to today’s technology, increasingly common. You can live in one country and provide services to a person or company based in another. However, this scenario can be confusing with regard to taxation and social security.
Today’s technology allows you to provide someone with services without ever having to physically meet them. For instance, communications, consultancy work and the transfer of knowledge are all services that can be provided remotely via the Internet, with no physical or geographical barriers. If you are a Spanish resident, which, as a rule, means that you live here for more than 183 days a year, you are subject to Spanish labour, tax and social security regulations with regard to the services you provide. But there are grey areas in the Spanish legislation when it comes to remote working. It is straightforward if you are self-employed. In this case, you are simply registered and treated as self-employed by social security and the tax office. You have the same obligations as any self-employed resident. However, you may not technically be self-employed if:
You only provide services for one person or company.
The receiver of your services trained you or provided you with or paid for the tools required to carry out the work commissioned.
You carry out the work according to the instructions of the service receiver, and the resulting products are sold on by them.
If these cases, the service receiver is actually your employer, and they are required to register you with the social security as an employee and meet their tax and employer obligations in Spain. It doesn’t matter if the company or person receiving your services does not have a permanent premises in Spain. Their obligations are clear, and you can report them for not meeting them.
Expats with financial or family interests in their home countries often have to go to local notaries to sign powers of attorney and other formal documents to handle legal matters in their home countries. Differences between the legal systems mean that these types of formalities generate more complications than we’d imagine possible.
The main problem arises when the law requires that a particular document be executed as a “public” notarial instrument for it to be valid. In Spain, for instance, legal transactions such as granting powers of attorney and transferring real estate are only valid if they are executed via a notarially-recorded “public document”. But there are countries, e.g., most common-law jurisdictions, where this type of “public document” does not exist.
What makes a document “public” in countries where this type of instrument does exist depends on the law in each country. In Spain, notarial documents are public documents, which guarantees that the facts stated in these documents are true in accordance with what the notary public has personally verified, and that, from a legal point of view, the statements of intent made in these instruments are authentic. Basically, all these characteristics give such documents privileged probative force.
We can only be sure that a notarial instrument will be recognised as such and, therefore, as a public document in the country where it is to be used, if the notary public who authorises it confirms in the document itself that all the legal requirements have been met, both in the jurisdiction it was executed and where it is to be used. In these cases, as a complement and guarantee to the service provided by the local notary, it is advisable to seek the advice of a lawyer who knows both legal systems.
Owners of real estate in Spain must pay tax on their properties regardless of their place of residence. In practice, resident and non-resident property owners pay the same taxes in Spain, although the names and collection mechanisms of these taxes differ.
A real estate property can generate earnings, either through renting or as a result of sale. Also, under tax law, just owning a property generates a notional income that is taxable. All these incomes have to be declared in Spain, and Spain is the competent state for collecting any tax due. This is according to all the double taxation treaties signed by Spain. These treaties follow the general OECD model under which income from real estate property can be collected in the country it is located in, regardless of the country of tax residence of the taxpayer.
In addition to paying any income tax due to the national Spanish tax agency, the property owner must also pay all other taxes due to other agencies. This includes, for instance, the municipal property tax collected each year by the local council. And, when you sell your property, the capital gains tax you also have to pay to the council.
Lastly, in Catalonia and some other autonomous communities, there is a further tax on an activity widespread among foreign investors in coastal properties: the short term leasing to tourists. The tax is a small amount due per night for every person staying in the property, which must be registered for tourist use with the local council.
The Spanish government is granting a special deadline for income tax declarations to all foreign nationals who are resident in Spain, as well as to any Spanish pensioners who have returned to the country after emigrating. These persons can now pay the whole amount of tax owed to the tax authorities with any penalties or fines for late payment waived.
If you reside in Spain for more than 183 days in a year, you are automatically classed as a resident for tax purposes, and as a consequence your worldwide income must be taxed in Spain. This also includes your pension. If you are retired and you do not have presented a tax declaration in Spain yet, you have until the middle of next year to submit a declaration and pay the tax, free from any penalties or interest.
There are now minimum amounts below which no income tax needs to be declared. For 2013, this minimum annual income for foreign pensions stood normally at €11,200. This amount is irrespective of whether you want to be assessed on your own or together with your spouse. However, this does not apply to government pensions (for civil servants), as these must always be taxed in your country of origin.
The increasingly closer exchange of information and data between the various Eropean tax authorities had made the Spanish Treasury aware of how many foreign pensioners, and emigrants who have returned from abroad, do not pay tax at all on their foreign pensions here or at least do not do it according to the rules. Pensioners are often elder and have greater difficulties understanding the legal situation in Spain, as they have been living abroad for many years. On the other hand they generally do not have many assets. That is why the Spanish government has set a special deadline of 6 months, beginning on 01.01.2015 to give such persons an opportunity to clear their debts with the tax office by paying 100% of their tax sparing themselves any interest and penalties for late payment.
On November 16, 2011 we published an article on this blog about the accusation presented by the European Commission to the European Court against the Kingdom of Spain of discrimination against non-resident at the time of inheritance. After a long process, the judges in Luxembourg finally gave the reason to the Commission.
On September 3, 2014 the Court of the European Union ruled in the case C127/12, concerning an appeal of the European Commission against the Kingdom of Spain for not complying with the founding treaties of the European Union. In its statement, the Commission requested the Court to declare the breach of obligations of the Kingdom of Spain as European partner because of the introduction of differences in the tax on inheritance and in the gift tax, depending on the place of residence of the participants, that is, whether or not they are resident in Spain. In practice, upon the acceptance of the inheritance or donation in Spain, non-residents generally pay much higher taxes than residents.
This requirement of the European Commission was the end result of a process initiated in 2007, in which the European government had already asked Spain to change its laws concerning the taxation of the gift or inheritance. A little change was made, but it did not satisfy the Commission of the European Union, who filed a lawsuit in the Court of the European Union against Spain. The state attempted to defend itself, but the court concluded that the state law in the application of inheritance and gift tax discriminates against non-residents, and this discrimination is an affront to the freedom of movement of capital, one of the fundamental freedoms, which should save the Union.
We take a lot of risks when deciding to buy a property in Spain. If the seller is a non-resident owner, there are specific risks that are usually not taken into account by investors.
A big part of the real estate on the Spanish coast belongs to owners who do not reside in our country and it is usually a house or apartment for holiday. If we buy this real estate to owners who are not residents, we must not forget the need to
be cautious to avoid later unexpected problems with the administrations.
The most common risk is the obligation to pay the council tax on the increase in value of urban land (the so-called “plusvalía municipal”). The law provides that this tax should be paid by the seller, and so, the buyer does not usually care about this expense when calculating the total cost of the investment transaction. However, when the seller is not a resident, the law obliges to pay this council tax to the buyer as a substitute of the seller, the one who should be actually required to pay it. This exception to the rule has its own logic, as it tries to avoid that the administration has to prosecute abroad the non-resident sellers who did not pay their taxes voluntarily, because when they sell their property in Spain, they very often do not retain any other property in the country, and, therefore, they are technically insolvent. In this case, the municipality requires the payment of the tax to the party who is closer and this is the buyer.
That is why during the registration of the purchase contract we should require the seller the corresponding provision of funds (or withhold the foreseen amount of the tax from the money that is still owed to the seller for the property). If this exception to the general rule is not considered and no precautions are taken, in the case that the municipality requests that we as buyers pay the tax on the increase in land value because the seller did not pay this tax freely, we will have no choice but to undertake this payment, because, before the Spanish administration, we would be the only one who is obliged to pay. Another thing is that we can claim ourselves afterwards from the seller what we have paid to the municipality, through a civil action against him.
The conditions for non-EU foreign nationals who wish to set up a business in Spain and obtain a residence permit which includes permission to carry on an activity on their own account are a guarantee of the business owner’s solvency and the legality and viability of the business.
A residence permit for Spain (which also allows free movement within the Schengen area) can be obtained by setting up a business. The legislation aims to prevent potential fraud by ensuring that the applicant for the residence permit with permission to carry on an activity on their own account is not planning to establish a dummy company, and that the business will generate jobs and contribute to the nation’s prosperity.
How can it be proved that the business has sufficient funds with which to implement the planned investment? How high is the expected return on the investment? How many jobs will be created? Here, an opinion should be sought from a business association registered in Spain or an association for self-employed workers and freelancers. The application for a residence permit with permission to carry on an activity on one’s own account, together with additional proof of the legality and viability of the business, must be submitted to the Spanish consulate in the respective country in which the applicant usually resides. Only once the office approves the application will a visa be issued for travel to Spain and the establishment of a business. For this reason, the process is usually undertaken in collaboration with Spanish partners, who will work on the setting-up of the business until a residence permit has been issued.
When setting up a business in Spain, EU citizens have to meet similar conditions to those required of Spaniards. In contrast, other foreign nationals, such as Russian citizens, for example, are subject to a special procedure if they want to carry on a business activity in Spain. In future, it is likely that this procedure will also apply to business start-ups by Swiss nationals.
Unlike employees of third parties, who could be seen as a threat by job-seekers, investors are always welcome. Investors are both those who make use of their investments personally (a holiday home or retirement residence, for example), and those who invest as entrepreneurs in order to carry on a business activity on their own account. However, when setting up a business in Spain, foreign entrepreneurs are not all subject to the same conditions.
A lot of dust has been kicked up by the news that a referendum was held in Switzerland in which it was decided to shortly make changes to the law to restrict immigration and the free movement of EU citizens. One direct consequence of this restriction is that the agreement on free movement and free choice of residence within the Schengen area will have to be revised. As always used to be the case, Swiss nationals will then no longer be able to settle in Spain and carry on a business without meeting the same conditions as other non-EU citizens, such as Russian citizens, for example. In contrast, EU citizens from member states in the Schengen area can set up a business in Spain virtually unhindered.
In enabling this, the Spanish government is attempting to reinvigorate the property market by attracting foreigners from outside the European Union with the granting of a residence permit for investing in Spain, which brings the added benefit of being able to move virtually freely around various member states under the Schengen Agreement.
Here, too, there is a danger that an investor will view the purchase of a property as an opportunity to do business in Europe. This can mean that they fail to check sufficiently thoroughly as to whether the purchase of the property is safe and reputable, as they want to take advantage of the opportunity to gain legal residency in Spain. The risk is the same as for the tourist who wants to enjoy their holiday rather than attending meetings with lawyers. In this case, too, the investment is a means, not an end, for just as the tourist sees the acquisition of a property as a means that secures them their holiday in Spain, the entrepreneur sees their opportunity to obtain a residence permit by purchasing a property, which then enables them to move freely around the Schengen area. Both view getting adequate protection for their purchase as unnecessary. If any problems subsequently arise, they find themselves compelled to find a lawyer to solve the problems arising from their failure to seek independent, professional advice. However, by then it is often too late, and if there is a solution, it will involve much higher costs than if they had sought advice at the right time. Well-advised investors can avoid making such mistakes.