Spanish Supreme Court upholds the validity of tax residence certificates issued by other tax administrations

In a recent ruling (no. 2735/2023 dated 12 June), the Supreme Court (SC) clarified that when there is a conflict regarding a taxpayer's tax residence, the Tax Residence Certificate issued by another state that has signed the Double Taxation Agreement (DTA) will be considered valid. Moreover, such certificates cannot be automatically rejected by the Tax Administration.

Background

In this particular case, the issue at hand related to the regularisation granted by the State Tax Administration Agency (AEAT, in Spanish) to an individual concerning the payment of Personal Income Tax (PIT). The AEAT has deemed that the individual was a tax resident of Spain between 2008 and 2010.

The individual presented several tax residence certificates issued by the authorised tax departments of the United States while applying for the DTA between the Kingdom of Spain and the United States. The objective of providing these certificates was to demonstrate that the individual was a resident of a country other than Spain.

Based on the available documentation, both the AEAT and the National Court (NC) determined that the tax residence certificates were only suggestive in nature. After considering other information and documentation provided, the conclusion drawn was that the taxpayer was a Spanish tax resident during the relevant period.

The NC also concluded that it was not necessary to assess the application of the relevant DTA, given that there was no conflict of residence that would have required recourse to the rules provided for in art. 4.2 of the convention, known as the "tie-breaker rules".

Conclusions of the Supreme Court

In a tax residence dispute between two countries, the SC's unanimous decision determines that the authenticity of a tax residence certificate issued by the tax authorities of the other contracting State, as defined in the DTA, must be taken into account and considered valid.

Regarding tax residence certificates issued by another State with a DTA with Spain, the SC emphasises that national administrative and judicial bodies lack the authority to evaluate the circumstances under which such certificates were granted. Moreover, unilateral rejection of these certificates is not permissible since specific rules established in the DTA must be applied to resolve any conflicts that may arise.

It is worth noting that the SC has emphasised that the criterion of the "centre of vital interests" established in Article 4.2 of the DTA between the Kingdom of Spain and the USA is much broader than the concept of "centre of vital interests" established in Article 9.1(b) of the PIT. Therefore, in the event of a conflict, the rules of the Convention must be followed, and these rules must be interpreted independently of the national laws that contain similar concepts.

Regarding natural persons residing in both Contracting States, Article 4.2 of the DTA sets out four "tiebreaker" criteria to determine the applicable jurisdiction: 

• where the person has a permanent home;
• where they have the closest personal and economic relationships (referred to as the centre of vital interests);
• where they have their habitual residence, and
• where is their place of nationality.

Furthermore, if the situations in both states are similar or in the event of a disagreement, an amicable procedure should be adopted to settle the conflict.

The ruling highlights that the details mentioned in a tax residency certificate issued under these circumstances should be considered as neglecting them would go against the regulations outlined in Article 96 of the Spanish Constitution and the DTC between the two nations.

Osborne Clarke comment

The recent SC ruling in Spain has significant implications for the tax industry, emphasising the critical role of precision and dependability in issuing tax residency certificates. 

The ruling can significantly influence how tax authorities issue and use tax residence certificates in the future. As a result, it is expected that there will be extensive discussions at a legislative level regarding the necessity for increased regulation and oversight of the entire process.