What tax obligations are there? What taxes do the company and the employee have to pay? How can double taxation be avoided? How can relocation expenses be optimized?
There is a misconception that globalization only affects large corporations. But globalization is actually a crucial factor for all companies, including SMEs. Many tax-related questions arise in human resources departments when they have to hire a foreign employee who they have to bring to Spain, or when they relocate a Spanish employee abroad.
Step 1. Tax residence in Spain or in another country
What first has to be determined for any individual is their tax residence — in the origin or destination country, according to domestic legislation and double tax agreements.
In terms of Spanish laws, a person is considered tax resident when they remain in Spain for more than 183 days in the calendar year, or when their main nucleus or base of their economic activities or interests is in Spain (in addition, unless proven otherwise, it is assumed that the taxpayer's main residence is in Spain when their spouse (where not legally separated) and their dependent children below legal age have their main residence in Spain).
Step 2. Tax obligations
Once the individual’s tax residence has been determined for each year, the obligations they may have in that country will be analyzed.
If the individual is considered a tax resident in Spain, in broad terms the employee must pay tax in Spain for all income made globally, at the progressive rate corresponding to their income. However, Spanish law provides certain exemptions and deductions for the international relocation of employees.
In addition, non-residents pay tax only on Spanish income. However, non-residents must pay Non-Resident Income Tax in Spain, for instance, if they own and use a property.
Step 3. Tax planning
Once the employee’s tax residence and the employee's and the company's tax obligations in both countries have been established, it can be assessed whether the international relocation carries a higher tax bill than if the employee had stayed in their country of origin.
As such, thorough tax planning is recommended before proceeding to relocate an employee.
It is also recommended that companies have a relocation policy, in which they establish mechanisms to help accommodate the employee in the relocation, and for the company not to be disadvantaged.
Our last webinar, on April 9, developed these issues and went into much greater detail, and also addressed international social security and migration matters. Watch the video here.