B Law & Tax
24 April 2024

Taxation of digital nomads

The General Directorate of Taxes (DGT), an entity attached to the Ministry of Finance and Public Function, with the primary function of establishing the criteria for the application of various taxes, including Personal Income Tax (IRPF), has recently issued relevant pronouncements.

In this regard, in the case of a taxpayer who telecommutes from a foreign country with which Spain has an agreement to avoid international double taxation, and acquires tax residence in that jurisdiction, the DGT recognizes exclusive tax jurisdiction to that country. Consequently, Spain would not be entitled to tax, either under the IRPF or under the Non-Resident Income Tax (IRNR), the labor income obtained by this individual, even if it is paid by a Spanish company for services provided remotely by its employee.

This situation presents a powerful tax strategy, as if the destination country for telecommuting offers a favorable tax regime and possibly a lower cost of living, the net result for the worker would be higher, without the need to increase their remuneration.

From the employer’s perspective, this can also be an effective tool for attracting and retaining talent, by allowing greater tax flexibility and benefits for employees, similar to flexible compensation systems.

A concrete example would be Portugal, where the “Non-Habitual Resident Regime” allowed taxation at a flat rate of 20%, with a potentially lower cost of living than in Spanish cities like Madrid or Barcelona, which could result in considerably lower tax burdens for certain income levels.

In the case of an employee of a Spanish company who requests to telecommute from different jurisdictions for short periods, the existence of agreements to avoid international double taxation facilitates logistics and tax treatment. If presence in each country does not exceed certain established thresholds, those countries would not have the right to tax the employee’s income, and the company would also not have the obligation to withhold taxes or report on those incomes in those countries.

This same principle could apply if Spain becomes a receiving country for telecommuters, allowing those who transfer their tax residence to the country to benefit from special regimes such as the Special Regime for Posted Workers (known as the “Beckham Law”), which offers a fixed tax rate of 24% on labor income received abroad, excluding other types of income such as financial or capital gains.

However, to facilitate international telecommuting from a business perspective, careful planning is required to assess tax and legal obligations in destination countries, including the possible need for registration and tax withholding, as well as the risk of permanent establishment.

It is worth noting that an increasing number of companies, both domestic and international, are implementing remote or hybrid work policies that allow employees to telecommute from other countries, either temporarily or permanently. Managing and overseeing these international telecommuting requests is essential to avoid legal and tax issues for both employees and the company, while also ensuring the safety and health of workers in their remote work environment and being aware of their location at all times to take appropriate action in case of contingencies.

Furthermore, regarding Social Security, the European Commission has recommended that Member States allow workers to maintain their affiliation with the Social Security system of the country where their employment contract is located, without the obligation to contribute in the country from which they telecommute. This flexibility provides greater security for both companies and telecommuters by avoiding the need to register with the Social Security systems of other countries and ensuring the continuity of contributions, thus preserving the present and future rights of employees.

However, regulatory modification will be required to adapt the Community Regulation to this mode of international telecommuting and provide it with greater legal certainty.

B Law & Tax International Tax & Legal Advisors.


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