BackThe Supreme Court, in its ruling of June 12, 2023, holds that the tax residence conflict must be resolved following the rules established in the Convention. Specifically, reference is made to Article 4.2 of the Convention, which establishes four successive criteria to determine the residence of a natural person in case he/she is a resident of both Contracting States: the availability of a permanent dwelling, the closest personal and economic relations (center of vital interests), the place where life is habitually carried out and the nationality.
The Supreme Court overturns the judgment of the Audiencia Nacional which held that the evidence provided by the appellant was largely irrelevant due to the lack of data on his assets and income in the United States. The Supreme Court considers that it is up to the interested party itself to prove its tax residence and cannot transfer that burden of proof to the Administration through a request for data to the competent US authority. On the other hand, the Administration presented circumstantial evidence showing real estate investments, assets, income collection and rights located in Spain, which led the Court to conclude that the main core of the appellant’s economic interests were located in Spain. Therefore, the Tribunal determines that the appellant should be considered resident in Spain and subject to taxation in this country, without the need to apply the Double Taxation Convention with the United States, since there is no conflict of residence requiring recourse to the rules of Article 4.2 of the Convention.
Considering that conflicts of residence between signatory States of a Double Taxation Convention must be resolved by applying the “tie-breaker” criteria established in the Convention, the question that arises is whether the “tie-breaker rule” of article 4.2 of the Convention, which refers to the “center of vital interests”, is equivalent to the concept of “nucleus of economic interests” according to article 9.1 b) of the Personal Income Tax Law.
The Court clearly states that the tax residence conflict must be resolved by applying the rules set out in the Convention, specifically in Article 4.2. This article establishes four successive “tie-breaker” criteria for determining the residence of a natural person who is resident in both Contracting States: the availability of a permanent home, the closest personal and economic relations (center of vital interests), the place of habitual residence and the nationality. If all or none of these circumstances are met in both States, an amicable procedure must be used to resolve the conflict.
In order to analyze the existence of a residence conflict between two States, the validity of a residence certificate issued by the tax authorities of the other Contracting State in accordance with the Double Taxation Convention must be presumed. A State signatory to a Double Taxation Convention cannot unilaterally question the existence of a residence conflict, without applying the specific rules established in said Convention for these cases. Therefore, in the presence of a residence conflict, it is necessary to resort to the rules provided in the Double Taxation Convention for its resolution, interpreting them independently in relation to domestic rules containing similar concepts. Specifically, the “tie-breaker” rule established in Article 4.2 of the Convention, referring to the “center of vital interests”, is broader than the concept of “core of economic interests” of Article 9.1 b) of the Personal Income Tax Law, therefore, they are not comparable.
In order to avoid a breach of the right to effective judicial protection, when there is a tax residence conflict between Spain and the USA, countries with a Double Taxation Agreement, the competent authority must resolve it by applying the “tie-breaker” criteria of article 4.2 of the Agreement. It is agreed that the proceedings be reinstated so that the court can resolve the conflict according to the rules of the Convention.
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