What is an Expat?
An expatriate, or expat, is an individual who has left their country of citizenship and lives and/or works in another country. This is often for work reasons and temporary. An expat can also be someone who relinquished citizenship in their home country to become a citizen of another.
Why Did the U.S. and Spain Enter Into a Tax Treaty?
The United States and Spain entered into an international income tax treaty many years ago with the goal of providing clarity regarding certain tax rules affecting individuals of both countries. The treaty is intended to benefit individuals from the United States who reside in Spain and vice-versa by minimizing inconsistencies and avoiding double taxation.
How Does the U.S. and Spain Tax Treaty Work?
One of the primary benefits of the treaty is relief from double taxation. What this means is that an individual can claim a credit for taxes paid in the other country to avoid paying taxes in both jurisdictions on the same income. However, the benefits are limited for most American expats living in Spain.
The treaty does ensure that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid, which normally depends on where the income arises. Further, US expats can avoid double taxation on their income in Spain by claiming US tax credits when they file their US tax returns up to the same value as Spanish income taxes that they’ve already paid.
Who is Considered a Tax Resident in Spain?
Pursuant to the Convention, a resident of a tax treaty is a person who has the intention of being a resident of that country either by domicile, residence, place of management, place of incorporation, or any other criterion of similar nature.
Foreigners who spend more than 183 days a year in Spain are considered Spaniard residents for tax purposes. Further, if a foreigner has a business or economic interest based in Spain or their spouse and/or underaged child are tax residents of Spain, they will likely be considered tax residents of Spain.
How Do Expat Taxes Work for Americans Living in Spain?
US citizens living in Spain have to file taxes both with the American government and the Spanish government. Additionally, all US Citizens are required to file a US federal tax return regardless of where in the world they live or their income is generated.
Moreover, expats who earn over 22,000 euros a year from just one employer must file a Spanish tax return. Individuals living in Spain will also typically have to file an annual tax return there if they receive income from multiple sources, are self-employed, or receive more than 1,000 euros of rental income in a single year.
Further, those considered tax residents of Spain will be taxed on their worldwide income, subject to some exclusions, and those considered non-residents will only be taxed on income they received from a Spanish source.