The Spanish Special Regime for New Temporary Tax Residents (“NTTR”)

The Spanish Special Regime for New Temporary Tax
Residents (“NTTR”)

Unlocking the NTTR: Spain’s Gateway to Tax Efficiency for Expatriates

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Explore the NTTR: Spain’s tax regime for expats, offering unique tax benefits for a smoother relocation experience.

Widely known in the market as “The Beckham regime”, and formally referred to as, following a literal translation, “Special Tax Regime applicable to employees, independent professional contractors, entrepreneurs and investors expatriated into Spain” -no wonder the shortcut-, I have opted to have it abbreviated as the NTTR, for convenience and for lack of rights to use the famous footballer’s name. Hope it sticks, but fine if it does not!

This, the NTTR, is the Spanish “competitor” to the Portuguese Non-Habitual Resident (NHR), the UK non-domiciled regime, the Italian or Swiss forfait fiscal or lump-sum, and other analogous creatures that have sprung over the years to lure overseas taxpayers of various profiles to come onshore in each respective jurisdiction. Nowhere is that competition felt more openly than in international tax conference panels where advisors of the competing jurisdictions read the audience through residency grids, evoking those of longer tradition about holding company locations. Like in these, for which the requirements of substance, including functions and business rationale, have grown more stringent over the years in response to the proliferation of regimes, one could expect some reaction aiming at curtailing the same trend in the proliferation and perceived increasing abuse of those.

Substance Over Form: The Residency Test

But this is a very different test, I believe. Whilst the substance of companies must be contractually added given their “ethereal” nature, residence is typically much more tied to worldly circumstances. The most widely shared test of residency pivots around counting days of presence, and that is a fact: anyone knows where a day is spent. True, some jurisdictions count a day of presence with merely touching their soil or spending only a few hours there, what allows for having a single same day shared among various countries, but once all rules factored in, one could easily distribute the days of a year along the various countries visited.

Typically, only in those where the person owns a place that he or she can call home, a place that is readily available at his or her discretion, would qualify to become the jurisdiction of tax residence, thus, excluding all those other temporarily visited for business or pleasure travels.

Hence, if one has a home in, say, Spain and spends significant time in this country, the qualification as a Spanish resident taxpayer would be unarguable. There is no more substance required. Some could reproach that person for having settled in Spain with the sole or main intention to lower his or her tax bill, but that could not be done beyond morally subjective boundaries, without an impact on the legal realm.

Navigating International Tax Agreements

What the “departing jurisdiction”, or any other competing one where the taxpayer had a home (or other ties) and spent significant time, could do against such tax- motivated move would never be to disallow it or to deny residency in the other country, but could be to apply stricter rules or residency tests. And this is what happens in practice when taxpayers applying these special regimes are not granted access to the protection of Double Tax Agreements (“DTA”).

The bar in this respect is not at the same level in all competing jurisdictions. Both Italy and Switzerland regard taxpayers under their forfaits as tax residents for all purposes, and grant certificates of tax residency for treaty purposes. The basis for that is that they tax income no matter the source, albeit applying “special” rules to calculate the tax base or the effective tax rate. One could call that “the trick” rather than “the basis”, but that’s what we’ve got. The UK also treats them as tax residents for DTA purposes, evidence of which is that in some concrete DTAs, such as that with Spain, relief of tax at source is conditioned on remittance and actual taxation. Portugal also issues such certificates for their NHRs.

And Spain… well, Spain, as we all know, is different. In this matter we could say that it is more loyal to her peers and has decided that such certificates will not be issued. Hence, taxpayers coming to enjoy the NTTR will have to break ties with their home or departing jurisdictions at a higher bar, without the right to rely on the Treaty tie- breaker rules.

Possibly we Spaniards think that our country is so much worth coming onshore that those closer ties and connections will be easily established. Practice will tell. But let’s move onto setting about the main features of the NTTR.

Key Features of the NTTR

The “N” for “New” in the NTTR refers to the requirement that the taxpayer has not been tax resident in Spain in the preceding five years. This period has been brought down from ten in the amendments that were introduced with effect from January 1, 2023 (“the Amended Regime”), bringing about a wave of brain return balancing off the brain drain we suffered post our dramatic financial crisis and real estate bubble burst.

The first “T” stands for “Temporary” and refers to the fact that the special regime applies for the first year of tax residency and the following five, i.e. totalling six (more on that later). This is a bit of a showdown when compared to its competitors: the Portuguese 10-year limit, the 15-year Italian, the same 15 year in the UK, and the no- limit Swiss. Each of these showcases unique characteristics tailored to attract individuals from across the globe, highlighting the diverse approaches countries adopt to enhance their appeal to international talent, wealth, and investors.

The latter “TR” denotes Tax Residents, and indeed, this regime treats taxpayers as residents, albeit with the right to make an election to be taxed under the Non- Residents’ Income Tax Act. This is the main feature of the NTTR regime: with one sole exception, only Spanish sourced-income and Spanish-situs assets shall be reportable and taxable. This is a very powerful factor of attraction for wealth creators and owners who can enjoy a few years in Spain without bringing onto the Spanish tax net their existing wealth and income, most likely situated in other territories.

The sole exception is income deriving from employment and dependent work. This is taxed always, no matter the source albeit at a significantly lower rate as compared to ordinary residents (24% fixed for a band up to €600K), but with a reduced access to international double tax relief.

The loyalty to their international peers is not seen only in the aforementioned lack of granting of certificates of residency for treaty purposes, and in the lower-than- average time period of application, but, very importantly, in the criteria for eligibility. Merely spending enough time in Spain is not sufficient; there must be a reason, as we will see in the following section, connected with creating economic value in the country and only in a specified set of circumstances.

Eligibility and Inclusivity of the NTTR

Since the inception of the regime, eligibility was limited to employees relocating to Spain. Within these were included those coming to serve as directors of companies so long as they did not hold a percentage stake in those companies equal to or greater than 25%.
The Amended Regime has widened the scope of eligible taxpayers to include, besides employees:

a) Investors and business owners who come to Spain to serve as directors of entities which do not qualify as merely passive asset-holding, without the previous 25%-stake limitation. Noteworthy that the entity does not need domiciled, incorporated/created or resident in Spain, although this will likely be the norm given the causal relationship between the appointment as director and the relocation.

b) Entrepreneurs who come to Spain to undertake a certified qualifying business activity.

c) Highly qualified professionals who come to Spain provide any type of services to certain defined start-ups or to provide certain limited services to any client (training, research, development and innovation).

d) And, within the subset of employees, those who come at their own initiative to continue to work remotely for their non-Spanish employers by telematic means.

e) Also relevant is the novelty that spouses and under-25 children, with certain limitations, can benefit form the NTTR on the back of the qualifying taxpayer.

And like before the Amendment, the NTTR remains closed to, not eligible for those individuals who in their own name undertake an independent economic activity, other than those of letters b) and c) above, from a permanent base in Spain. Because business activities can be undertaken through companies, this restriction is effective in practice only for independent professionals, typically of regulated professions, who, even if working in collective firms, are deemed to continue carrying out independently their profession.

Elements of uncertainty and potential controversy.

Let us pause for a moment in the used wording “who come to Spain to”. This is an intentional test; the exact drafting of the Law is that “the relocation to Spain must be the consequence of”.

We must admit this is bringing about undesired uncertainty in the numerous conversations we are having with investors and business owners. Leaving aside the start-up, R&D and innovation contexts, the only available route for them is that referred to under letter a) above. Because there is not a legal requirement to be Spanish resident to become director of a Spanish entity (needless to say of a non- Spanish one), this requirement must be in our view read and construed in the sense that management duties of that director position must be of a nature that undertaking them requires a substantial presence in Spanish territory.

Now, the primary motivation of many of them is to relocate away from the countries where they are currently living for a variety of reasons, including unacceptable levels of insecurity, longing for spending some time in a sunny country, and wishing to lower their tax dues for a limited period. And only when they consider Spain amongst other possible locations, and they legitimately give regard to the tax environment alongside other elements of comparison, it is that they begin considering creating anew that position of director.

We do not think that this order in the sequence of motivations, per se, makes it impossible to access the NTTR. However, the need to come to Spain to discharge those particular director management duties must be clear. If the assumed business role has little to do with Spain or does not require much engagement from the individual, relatively to other occupations he or she may have outside Spanish territory, the cause-effect relationship –“as a consequence of”- may be challenged.

It can be seen that this is a rather subjective test, intention-based, where one can only advise care and prudence.

The level of relative engagement admits though considerations of personal motivations. One can maintain an important level of activity abroad, as well as significant business undertakings in other countries, and yet place a significant value in a business venture connected with the Spanish territory, so significant, even if non-monetary terms, that make the relocation worthwhile, especially if the non- Spanish interests can be remotely managed. To be clear, the potential controversy and conflict we are pointing at here is not originated by the application of general or special anti-avoidance provisions established in our legislation. We are not talking here of simulation or of tax-motivated artificial arrangements. The relocation to Spain is real, and so is the appointment as director. The conflict shall arise around the assessment of how strong the need is to come to Spain to take that position.

We are afraid that many, not willing to fully immerse in a business activity, and wishing only to invest in real estate for rental or by acquiring shares in third-party businesses, both regarded, under certain conditions, as active trades and not merely passive asset-holding (recall the 25%-stake limitation), will find intolerable that level of uncertainty, especially as compared to other regimes, such as the Swiss or the Italian, where certainty is assured by way of advanced private binding rulings. For those willing to immerse in a business activity in Spain, the regime may indeed be an added incentive.

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