B Law & Tax
23 May 2024

Tax residence certificate issued by another State in the sense of the Double Taxation Treaty: the national administrative or judicial authorities cannot question its validity without applying the “tie-breaking” rules provided for in the corresponding Treaty.

In the last year there have been several pronouncements by judicial organs, among others by the Spanish Supreme Court itself, which have set limits to the actions of the Tax Administration when claiming tax residence in Spain by means of a practice (which, unfortunately, is not uncommon) consisting of questioning, or even ignoring, the content of tax residence certificates issued by the tax authorities of other countries. In these certificates, these authorities certify (redundancy aside) the tax residence in their territory in accordance with the rules contained in the corresponding Double Taxation Treaty signed with Spain.

Below, we analyze a ruling of the High Court of Justice of Asturias, in which the judicial organ proceeds to apply the provisions of the Double Taxation Treaty signed between Spain and the United Kingdom.

Case Under Analysis:

The controversy analyzed by the High Court of Justice (hereinafter, SCJ) of the Principality of Asturias, in its judgment no. 1238/2023 of December 20, 2023, appeal no. 197/2023, focuses on determining whether the appellant’s tax residence is in the United Kingdom or in Spain.

In order to answer the question raised, it is necessary to refer to the regulation stablished in the Personal Income Tax Law (hereinafter, PIT Law), which in its article 9.1 states the following:

“1. It will be understood that the taxpayer’s habitual residence is in Spanish territory when any of the following circumstances occur:

  1. That he/she stays more than 183 days, during the calendar year, in Spanish territory. In order to determine this period of permanence in Spanish territory, sporadic absences will be computed, unless the taxpayer proves his/her tax residence in another country. In the case of countries or territories considered as a tax haven, the tax authorities may require proof of residence for 183 days during the calendar year.

In order to determine the period of stay referred to in the previous paragraph, temporary stays in Spain that are a consequence of obligations contracted in cultural or humanitarian collaboration agreements, free of charge, with the Spanish Public Administrations will not be computed.

  1. That the main nucleus or the base of its activities or economic interests, directly or indirectly, is located in Spain. 

It will be presumed, unless there is evidence to the contrary, that the taxpayer has his/her habitual residence in Spanish territory when, in accordance with the above criteria, the spouse not legally separated and the minor children who depend on him/her habitually reside in Spain”.

Under the aforementioned Spanish regulations, an individual may be considered a tax resident in Spain when any of the circumstances set forth in the aforementioned article are met. However, a residence conflict may arise if such person also meets the requirements to be considered a tax resident in another State with which Spain has a Double Taxation Treaty (hereinafter, DTT). In such cases, this conflict of residence must be resolved by applying the tie-breaking rules established in article 4.2 of the DTT.

In the case under analysis, the taxpayer had provided a certificate of tax residence in the United Kingdom, issued by the tax authorities of that State in the sense of the DTT. However, the Court of First Instance “questioned” its validity, considering that there was no conflict of residence between Spain and the United Kingdom that should be resolved by applying the tie-breaking criteria set out in article 4.2 of the DTT.

This reasoning was based on the idea that, although the certificates may indicate tax residence in the United Kingdom, it was not sufficient to invalidate the multiple evidence provided by the Spanish Administration suggesting that the appellant was tax resident in Spain.

The SCJ, in the aforementioned ruling, considers that administrative or judicial authorities are not competent to judge the content of a tax residence certificate issued by another State and, consequently, cannot disregard its content.

This matter, among others, is analyzed and resolved by the recent Supreme Court Ruling of June 12, 2023 (appeal 915/2022) whose doctrine, although referring to the DTT between Spain and the United States of America, is applicable.

For this reason, based on the jurisprudential doctrine, the tax residence certificate must be considered valid to prove tax residence in the United Kingdom and, therefore, it should have been concluded that there is a conflict of dual residence, without being able to unilaterally interpret the DTT (excluding its application). 

In such cases, where there is a conflict of tax residence, it is necessary to apply the tie-breaking rules provided for in Article 4.2 of the Treaty:

“2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: 

  1. he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests); 
  2. if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
  3. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national; 
  4. if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.”.

In this regard, the Chamber of the SCJ considered that the solution to the conflict of dual residence, given the circumstances of the case under examination, and in application of the provisions of art. 4.2 of the Treaty with the United Kingdom, should be redirected to determine the tax residence of the appellant in accordance with the place where she maintains the closest personal and economic relations.

It was demonstrated by the appellant that the center of her vital interests was in the United Kingdom, giving special relevance to the fact that her husband and minor daughters lived in London, and the presumption of cohabitation of the marriage provided in Article 66 of the Civil Code (hereinafter CC), as well as the obligations of parental responsibility provided in Article 154 of the CC.

Conclusion: 

The judgment of the High Court of Justice of the Principality of Asturias underscores the importance of respecting the tie-breaking rules provided in the Double Taxation Treaty when there is a conflict of tax residence between two signatory States. It is not possible to deny the validity of a certificate of tax residence issued by another State based solely on indications provided by the administration suggesting residence in Spain.

Each State has the sovereignty to determine tax residence according to its internal legislation, but when a conflict arises, it must be resolved following the tie-breaking rules established in the applicable Treaty.

In this specific case, the judgment confirms that the administration cannot unilaterally invalidate a certificate of tax residence issued by the United Kingdom without applying the tie-breaking rules of the Treaty, which, in this particular context, determine tax residence in the United Kingdom according to the taxpayer’s centre of vital interests.

For more information please contact our team:

B Law & Tax International Tax & Legal Advisors.

https://blaw.es

At B LAW&TAX we specialise in international tax advice for both companies and individuals. If you would like any further information, we will be pleased to help you at 917817194 or [email protected]