With the rapid advancement of the internet and the emergence of more flexible business models, the opportunities for establishing businesses with international relationships are much greater.
It happens relatively often in startups that some partners or involved parties are non-resident employees, so there are often many doubts regarding the tax management involved in these cases.
It is always important to get information from reliable and updated sources, because laws constantly evolve and seek to adapt to the new realities that arise at a fairly rapid pace driven by technology.
How does the taxation of non-resident partners and/or employees work?
Before telling you how the taxation of non-resident partners and/or employees in Spain works, it is necessary to understand the characteristics that define these types of workers.
It only applies in cases where the employee resides more than 183 days a year outside Spanish territory.
In general terms, employees who maintain this condition must be subject to a withholding tax of 24%, although there are some variables surrounding this issue.
For example, the withholding tax becomes 19% in cases where the non-resident worker is resident in an EU country. Norway and Iceland are also part of this level of withholding tax.
| State of residence | Retention rate |
|---|---|
| Resident | 24% |
| EU countries | 19% |
| Other | 24% |
Retention rates
Is it possible to recover withholding taxes?
The key point with regard to the management of the taxation of non-resident partners and/or employees is the imposition of withholding tax in accordance with the characteristics described above.
However, there are two cases in which an exception to the withholding tax is made. As a non-resident worker it is important to understand what measures are in place to recover the withholdings made.
Non-resident workers who are resident in other EU countries, Norway or Iceland, apply for the recovery of withholdings.
The other condition is that they have a low income, so they can make use of the optional regime for individuals resident in the European Union and the European Economic Area.
In order to be eligible for this benefit, the non-resident worker must meet certain conditions:
- The total annual income must be less than 90% of the personal and family minimum obtained in the case of having paid personal income tax.
- 75% of the income must come from Spain, having been taxed under the Non-Residents Income Tax.
| Conditions |
|---|
| Total annual income < 90% of the personal and family income minimum |
| 75% of income from Spain and taxed at non-resident personal income tax rate |
Conditions for the optional scheme
How to apply for a withholding tax refund?
Now that you know that while there are some measures to recover withholding tax from non-resident partners and/or employees, there is a fairly rigorous process to do this.
Tax Agency Form
- The first step in applying for this refund is to apply for the form approved by the Tax Agency in accordance with these assumptions.
- Nor is this something that can be achieved in a short time, as after this application must be filed from 2 May of the year following the year in which the withholdings occurred.
- On the other hand, 4 years is the deadline imposed for filing once the date established as one of the requirements for the withholding tax refund has started.
- It is also necessary to wait for the result of the resolution of the application made to the Tax Agency, which usually takes 6 months.
The process will continue if the tax office decides to accept the application for a refund.
In this case, a calculation will be made of the amount taking into account the difference between the withholding tax and the amount that would have been taxed on the basis of the salary.
Taxation of non-resident partners and/or employees with cross-border character
The process of taxation of non-resident partners and/or employees varies depending on the nature of the business and certain distinctive aspects of the business.
For example, a company that is located in an area adjacent to the borders with Portugal or France, and has professionals from those countries as part of its workforce, is a cross-border case.
In particular, a cross-border worker is defined as a professional whose place of residence is in the border area, being the place where he/she stays overnight.
This worker must also have an authorisation to work as a salaried employee in the border area of the contingent state.
Let us assume that your company has an employee who currently lives in France and who comes to your premises every day to work in your business and, once he has completed his working hours, returns to his home in France.
- In the event that this worker is considered to be a tax resident in Spain, he/she will have to assume the IRPF tax liabilities for the worldwide income.
- If the case is established in which it is determined that he/she is not a tax resident in Spain, then he/she will have to pay non-resident income tax in accordance with the income he/she receives in Spain.
Do foreign workers have to be paid in Spain?
If you have decided to hire foreign workers to perform their duties within your company, the employee in question will be subject to tax liability on the income generated within Spanish territory.
In this case, he/she will be subject to a withholding tax of 19% in the territory of the European Union or 24% if he/she is located outside this area.
| Location | Tax rate |
|---|---|
| Within the EU | 19% |
| Outside the EU | 24% |
Tax rates for foreign workers in Spain
Conclusion and final recommendations
Although the taxation of non-resident partners and/or employees can be a complex issue, by obtaining the right professional advice, you will be able to maintain an optimal management and avoid setbacks in your business.
From the point of view of the employees there are some cases where the application for the refund of such withholdings does apply, although the process is usually quite lengthy but it is entirely achievable.
Please contact our tax advisors in Barcelona regarding this topic.
FAQs
Are there exceptions to withholding tax for the taxation of non-resident partners and/or employees?
Yes, there are exceptions. Non-resident employees resident in EU countries, Norway or Iceland can opt to recover withholding tax. They are also eligible for the optional regime in certain cases.
What are the requirements to apply for a refund of withholdings in the taxation of non-resident partners and/or employees?
In order to apply for a refund, non-resident employees must meet certain requirements, such as annual income below 90% of the personal and family minimum and a high percentage of income generated in Spain.
How does the taxation of non-resident partners and/or employees vary in cross-border cases?
Taxation may vary in cross-border cases, where employees reside in border areas and work in another country. They must comply with certain requirements and be taxed according to their tax residence.
What recommendations can be offered for an optimal management of the taxation of non-resident partners and/or employees?
It is recommended to seek professional advice to ensure proper management of taxation. Despite the complexity, it is possible to recover withholdings in certain cases, and it is important to comply with the established requirements.
