How did the mobility restrictions decreed due to COVID-19 influence tax residency?

As is known, at the end of 2019 a global pandemic began that reached Europe in early 2020 and influenced all aspects of daily life, the effect it produced on taxpayers, unfortunately, not only emotionally speaking, but also in relation to tax obligations.

The Government of Spain decreed the State of Alarm, paralyzed the international transit of travelers, and imposed mobility restrictions on residents who were residents for tax purposes and those who were in Spain, despite not being their tax residency.

One of the issues that has always raised the most problems in personal income tax has been that of tax residency, which is far from the residence known in colloquial language as in other branches of law.

As the General Directorate of Taxes did, we will start from the interpretation of article 9 of the Personal Income Tax Law, indicating the following:

"1. It will be understood that the taxpayer has his habitual residence in Spanish territory when any of the following circumstances occurs:

1. That he stays more than 183 days, during the calendar year, in Spanish territory. To determine this period of stay in Spanish territory, sporadic absences will be counted, unless the taxpayer proves his tax residency in another country. In the case of countries or territories of those classified by regulation as tax havens, the tax administration may require proof of permanence in it for 183 days in the calendar year.
   To determine the period of permanence referred to in the previous paragraph, temporary stays in Spain that are a consequence of the obligations contracted in cultural or humanitarian collaboration agreements, free of charge, with the Spanish public administrations will not be counted.

1. That the main nucleus or the base of its activities or economic interests resides in Spain, directly or indirectly.
   It will be presumed, unless proven otherwise, that the taxpayer has his habitual residence in Spanish territory when, in accordance with the previous criteria, the spouse not legally separated and the minor children who depend on him or her habitually reside in Spain.

2. Foreign nationals who have their habitual residence in Spain will not be considered taxpayers, by way of reciprocity, when this circumstance is a consequence of any of the assumptions established in section 1 of article 10 of this Law and the application of specific rules derived from international treaties to which Spain is a party."

Therefore, without the intention of being exhaustive and with the intention of simply covering the object at hand, we must refer to the following aspects:

• Tax residency in Spain is considered produced when a natural and non-legal person remains in Spanish territory for more than 183 days.
  If in 2020 you stayed more than 183 days in Spanish territory, it is understood that you will have to present personal income tax for the year 2020, despite the fact that, due to mobility restrictions, you would not have been able to return to your “theoretical” country of residence, having, therefore, the consideration of taxpayer in Spain.
• However, this is in contradiction with Article 4.2 of the Double Taxation Convention, an article that is repeated in the conventions ratified between Spain and the Contracting State.
  This article establishes that the taxpayer residing in two different countries should never be considered at the same time established in these two countries.

This situation occurred, among other cases, in Morocco with the declaration of the State of Alarm, taking into account that many Moroccan residents were forced to stay in Spain for a period longer than they were allowed.

However, article 4.1 of the Double Taxation Agreement between Spain and Morocco refers to the internal regulations of the contracting States in order to determine which is the tax residency of taxpayers, being, by virtue of the Model Double Taxation Agreement offered by the OECD which establishes that the determination of tax residency is a matter that corresponds exclusively to the Contracting State.

It is noteworthy that the aforementioned article 9 of the Personal Income Tax Law establishes a presumption iuris tantum for the cases of residence of the spouse or minor children who depend on him for the purposes of determining their tax residency, but does not establish said presumption in the assumptions in which due to necessity or health emergency one must remain in Spain, leading us to think that it will be considered a taxpayer for all purposes.

The solution to this problem is given by the report “OECD Secretariat Analysis of Tax Treaies and the Impact of the Covid-19 Crisis”, dated April 3, 2020, which establishes guidelines that the member states could use.

The aforementioned report indicates in paragraph 34 that the determining criterion of the tax residency of the natural person who is forced to remain in Spain during the State of Alarm will be permanent home.

In addition, it continues to add that the one that is used in Spain by said natural person during a prolonged stay in time may be considered a permanent home.

In this case, the situation of double permanent housing would occur: one in the State of origin and the other in Spain.

If this occurs, the following criteria would be applied in order to consider one or the other as a habitual residency, in a hierarchical way:

• State where his center of vital interests is located.
• State where he usually lives.
• State of which he is a national.

Therefore, the Report foresees that it can hardly be considered that the natural person who is in Spain will be considered a resident in Spain.

For the purposes of the Report issued by the OECD as recommendations to the States, even if there is a Double Taxation Agreement, no tax implications should arise.

However, this criterion, which some countries have followed, does not prevent the Spanish State from continuing to apply the criterion of habitual residence for tax purposes referred to in article 9 of the Personal Income Tax Law.

By way of conclusion, it is relevant to indicate the lack of binding effects of the OECD Report, with each sovereign State deciding what is understood by tax residency, distancing the recommendations from the binding effect of the Consultation of the General Directorate of Taxes, being also relevant the voluntary and obligatory nature of the prolonged stay in Spain.