Relief in the United Kingdom and Portugal

The High Court ruling preventing the Treasury from questioning a tax residency certificate favors those affected by processes open to non-UK residents and those who benefit from the Portuguese system.

Good news for non-resident Spaniards in Britain, those who benefit from Portugal’s unusual residency regime and those affected by Treasury persecution. The latest Supreme Court ruling rejecting this was the Treasury DepartmentThe Spanish government questions a tax residence certificate issued by another administration for the purposes of applying double taxation avoidance agreements, and prefers taxpayers whose procedures remain open.

The ruling has implications for the appeal in the High Court of the British system of limited taxation (remittance basis, in English). This system implies that taxes are not paid on worldwide income, but only on income earned in that country and, where appropriate, on income transferred there.

In a future ruling, the Supreme Court will determine whether “a judicial or administrative body can, in order to verify the tax residence of an official, ignore the content of the tax residence certificate issued by the tax authorities of a country with which Spain has signed an agreement, since in that country it does not pay tax.” on its global income because it is subject to a tax regime that, although it applies to residents, limits taxes on income earned in that country.”

Although the ruling will analyze the Spanish-British double taxation agreement of 1975, which was replaced years ago by the current agreement, the Supreme Court’s decision will have a theoretical scope that will remove doubts about theoretical aspects that are very important for tax experts. Jurists assume that, after this year’s ruling, the court will side with taxpayers subject to the transfer tax and allow them to fully apply the old agreement.

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Residents of Portugal

Portugal received many citizens who benefited from the Portuguese non-resident system. The plan, which is now under review by the Portuguese authorities, allows for a series of tax benefits to attract large assets, entrepreneurs from the world of the Internet and technical or professional specialists. International celebrities such as singer Madonna or actor John Malkovich agreed to this system and moved to the country. In order to benefit from the flat tax of 20% on salary or services provided, it is necessary that the applicant for access to the system performs a high value-added activity, such as software developers, mathematicians, doctors or economists.

The Supreme Court ruling also has implications for the Spanish-Portuguese double taxation agreement. The Portuguese Administration issues tax residence certificates for the purposes of the Convention to all beneficiaries of this system. However, despite the strength of the Supreme Court’s ruling, the IRS is not making it easy to provide peace of mind to these taxpayers.

The Directorate General of Taxation (DGT), in a binding consultation in 2019, allows the Department to consider that a non-habitual resident cannot be considered a resident for the purposes of the Convention, despite the certificate.

This decision, although not very strong, raises doubts about the protection of residence certificates. The decision referred to the exclusion of taxpayers due to territoriality.

Moreover, the inspection, by invoking Article 4.1 of the Agreement, could negate its validity. “For the purposes of this Agreement, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. However, this expression does not include persons who are liable to tax in that State exclusively on income derived from sources located therein,” states this provision.

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In any case, this year’s ruling by the Supreme Court denies that the tax agency can question the Spanish-Portuguese double taxation agreement for a taxpayer whose tax residency is confirmed by a certificate issued by the Portuguese administration.

The ruling also confirms that the concept of center of vital interests includes, as defined by the OECD, a dual personal and economic element, which is broader than the domestic concept of center of economic interests.

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