As anyone who works in Gibraltar is already aware, employment income is taxed at source under the PAYE (Pay As You Earn) regulations, irrespective of where they live. Allowances (if claimed) and rates are based on personal circumstances and income during a Gibraltar tax year which commences on 1^st July and ends on the following 30^th June. Shortly after the tax year, tax returns are issued which should be submitted by 30^th September. The tax office then processes the tax returns and issues assessments. If no return is submitted, then the tax office will issue assessments based on the information they have on their files.

If you are tax resident in Spain, and believe that your tax obligation ends by paying tax at source in Gibraltar then you are mistaken. You are deemed to be Spanish tax resident if you spend 183 days or more in Spain in any Spanish tax year (the calendar year). When determining this, temporary absences are ignored, unless you can prove that you are resident in another country. 

If you do not spend 183 days in Spain, the tax authorities can still deem you Spanish tax resident if your centre personal or economic interests are in Spain. An example of your personal interests making you resident in Spain is if your spouse and/or (minor) children habitually live in Spain. An example of your economic interests making you resident in Spain is if the majority of your income was generated in Spain.

It is important to note that tax residency is based on the above rules, and not whether you have obtained “residencia” from your local police station which is primarily used for immigration purposes.

As a Spanish tax resident you are generally liable to Spanish tax on your worldwide income, capital gains (as they arise) and wealth, (wherever located), meaning that your Gibraltar employment income will automatically be liable to Spanish tax.

You are obliged to complete a Spanish tax return if you have employment income over €22,000, but it is very easy for this figure to be reduced to the limit of €10,000 (i.e. if you change employment etc). Therefore, if you are resident in Spain and earn over these limits in Gibraltar, you are legally obliged to complete a Spanish tax return.

Spanish resident tax returns need to be completed during May and June in the following tax year (the calendar year) in question. Therefore 2007 tax returns would need to be completed during May and June 2008.

When completing your Spanish resident tax return you will need to declare your Gibraltar income and Gibraltar PAYE tax, fortunately the Spanish tax authorities allow a credit for Gibraltar tax paid.  

It is worth comparing the Gibraltar and Spanish tax rates to help you get an idea of whether you could be liable to pay extra tax in Spain on your income.

Gibraltar tax rates

You can opt from one of two tax systems in Gibraltar which operate in parallel to each other. The Gibraltar tax system is covered in the Gibraltar tax rates and allowances section of our website.

Spanish tax rates

The 2008 Spanish tax rates are as follows:

You will also benefit from allowances such as a personal allowance, an earned income allowance, allowances for children, etc.

Traditionally Gibraltar income tax rates have been higher than Spanish rates meaning that no further tax was payable in Spain on your Gibraltar employment income. This may still be the case but will depend on your personal circumstances. If there is no extra Spanish tax to pay then the completion of a Spanish return is just an administrative exercise, (but an exercise that you are legally obliged to do).

It is important that you as a Spanish tax resident do not miss out on claiming important reliefs non residents do not have access to, such as a potential rollover on any gains made on the sale of your main home. This allows you to sell your main residence and re-invest all the proceeds into a new main residence without incurring a capital gains tax liability in Spain (subject to conditions). If you are not correctly resident in the system then you could lose this important relief and pay capitals gains tax at 18% on the gain.

As touched on earlier, it must be remembered that the amount of tax paid is always based on your personal circumstances, for example, the level of income earned, available allowances etc, which will vary on a case by case basis, hence the importance of seeking professional tax advice when completing your tax returns.