To be or not to be?

in the future, all resident people living in the Canary Islands should ask themselves this question. This is not the question of existence as such, as in Shakespeare, but the issue of tax domicile. In other words: I have a “residencia” (green DINA4 sheet or small cardboard) and I am registered in the Canary Islands for tax purposes. Or I have the residence in my home country and pay my income tax.

It Is well-known that the Spanish government is trying to increase the tax revenue, in addition to tax audits, by means of new legal regulations in order to reduce the budget deficit. Thus, by law, the obligation to provide information on income and assets abroad was introduced.

From the date of entry into force declarations must be submitted to the Financial Authority.

This obligation applies to individuals as well as to companies established in Spain (on the Canary Islands) for tax purposes and assets abroad (which has not yet been reported in the accounts or balance sheet).

The question arises: does this regulation affect me as a private person living in the Canary Islands? Or does it not?

From the tax consultant’s point of view, it is advisable to be more cautious in the future with the application of the “residencia” (also the admission criteria were tightened). For the relevant legal text, it can also be interpreted as meaning that the applicant, by means of the “residencia“, confirms that he intends to reside on the Spanish territory for tax purposes and to make the income tax declaration there over ALL assets and income.

In practice, however, it has so far been the case that only those who make a tax declaration in Spain, which also work or carry on a trade, go that far. Legally, tax residence in Spain and the Canary Islands has been defined in Spanish income tax law.

It states that a private person is resident in Spain for tax purposes if he or she resides more than 183 days a year within the Spanish territory, including the Canary Islands, or where he has a living (e.g. family, home ownership, income). If you meet one of these criteria, then you are a real (TAX) Resident in the Canary Islands and must submit your income tax return. As of January 1, 2013, the new declaration on income and wealth abroad has also been added.

What does the Spanish state mean by “income and wealth abroad”? It is primarily about values of over 50,000 euros. “Assets” are divided into three categories: capital assets, assets from rights and assets (shares, participations, life insurance and annuities) and real estate. Each individual category has a “free entry” of 50,000 euros. If this is not exceeded, you do not need to make an explanation.

Example: A German retiree lives in the Canary Islands and receives a monthly pension of 2400 euros which he duly states in his annual income tax return in Spain. In addition, he still has a fixed-term bank account in euros with a balance as of 31.12.2012 of 40,000 euros and a house in Germany – in the country in which he previously lived, with a value of 45,000 euros. Its foreign assets exceed a total of € 50,000. It could be me!

HOWEVER:

This way of thinking is not correct, since per category is summed up: capital assets 40,000 euros, so under 50,000 euros – all right! Real estate 45,000 euros, so under 50,000 euros – also all right! The pensioner does NOT have to submit a statement about the assets abroad.

BUT IMPORTANT:

When evaluating the property, one should rely on real, verifiable estimates. Real estate in Germany, Austria and Switzerland are generally worth more than 50,000 euros.

Finally, it should be said that one should not simply ignore this new obligation to provide information. Or to build on the fact that the Spanish government does not reach the information, because new law measures for mutual assistance and information exchange with other countries were agreed.

The law is subject to high penalties in cases of misrepresentation or concealment, the minimum rates of which, depending on the offense, have been set at 1.500€, 5.000€ and 10.000€.

Furthermore, rules on the exchange of information and mutual assistance with the tax offices of the European Member States have been established.

Dr. Thorsten Wrage