Consequences of Brexit on income tax for non-residents without a permanent establishment

Income tax for non-residents (IRNR) contains specific provisions applicable to residents of other EU Member States, which will no longer be applicable to taxpayers resident in the United Kingdom after the end of the transitional period.

However, it should be noted that there is a bilateral convention between the United Kingdom and Spain for the avoidance of double taxation, which will continue to apply.For this reason, certain income that will no longer be exempt under domestic law would nevertheless be exempt by virtue of the right to apply the Convention (e.g. interest).

For income earned by UK residents accruing on or after 1 January 2021 the following changes will need to be taken into account as a result of ceasing to be a taxpayer resident in an EU Member State:

Exempt income (Article 14 and Seventh DA TRLIRNR)

The following exemptions shall cease to apply:

• Interest and capital gains derived from movable property obtained by residents of another Member State of the European Union (EU), or of the EEA with which there are rules on mutual assistance in the exchange of information, with certain exceptions.

• Profits distributed by subsidiaries resident in Spain to their parent companies resident in another EU or EEA Member State with which there are rules on mutual assistance in the exchange of information, or to the latter’s permanent establishments located in other Member States, provided that they meet certain conditions.

• Dividends and shares in profits obtained by pension funds equivalent to those regulated in the consolidated text of the Pension Plans and Funds Act (Royal Legislative Decree 1/2002, of 29 November), which are resident in another Member State of the European Union or of the EEA with which there are regulations on mutual assistance in the exchange of information, or by permanent establishments of these institutions located in another Member State.

• Dividends and profit shares earned by collective investment undertakings covered by Directive 2009/65/EC of the European Parliament and of the Council, or by collective investment undertakings resident in EEA Member States with which there are rules on mutual assistance in the exchange of information.

• Fees between associated companies paid to a company resident in an EU member state or to a permanent establishment of this company in another EU member state, provided that certain requirements are fulfilled.

• Exemption for reinvestment in main residence for taxpayers resident in an EU or EEA Member State with which there are rules on mutual assistance in the exchange of information:capital gains obtained from the transfer of the habitual residence in Spain may be excluded from taxation, provided that the total amount obtained from the transfer is reinvested in the acquisition of a new habitual residence.

Taxable amount (Article 24.6 TRLIRNR)

The expenses provided for in Article 24.6 TRLIRNR, an article according to which taxpayers resident in another European Union or EEA State with which there are regulations on mutual assistance in the exchange of information, individuals, may deduct the expenses provided for in the Personal Income Tax Law, and in the case of entities, those provided for in the Corporate Income Tax Law, provided that it is proven that they are directly related to the income obtained in Spain and that they have a direct and inseparable link with the activity carried out in Spain.

Tax rate (Article 25 TRLIRNR)

For income taxed at the general tax rate, the general tax rate of 19% for residents of another Member State of the EU, or of the EEA with which there are rules on mutual assistance in the exchange of information, will cease to apply and the rate of 24% will become applicable.The following incomes can be cited:income from real estate, income from work, imputed income from real estate, etc.

Option for EU residents to pay personal income tax (Article 46 TRLIRNR)

The system of Article 46 TRLIRNR, a system whereby non-resident taxpayers, individuals, who can prove that they are resident in another Member State of the European Union or in a Member State of the European Economic Area with which there are regulations on mutual assistance in the exchange of tax information, will not be applicable, except for residents in countries or territories qualified by regulation as tax havens, who have obtained, during the financial year in Spain, at least 75 percent of their total income from work and economic activities, or that the income obtained during the financial year in Spain has been less than 90 per cent of the personal and family minimum that would have corresponded to them in accordance with their personal and family circumstances had they been resident in Spain and that the income obtained outside Spain has also been less than said minimum, and when the income obtained in Spain has effectively been taxed by the IRNR, they may choose to pay Personal Income Tax as taxpayer, but without losing their status as taxpayers by the IRNR.