CONSEQUENCES OF THE COVID-19-CRISIS ON THE FISCAL RESIDENCE OF NATURAL PERSONS

The COVID 19 pandemic has forced most countries, including Spain, to restrict the free movement of people, e.g. through quarantines and restrictions on international flights. As a result of these measures, many people find themselves forced to stay in and work from a country other than their usual country of residence. This raises the question of the extent to which this situation may affect a person's tax residence.

The tax residence of a natural person is primarily determined by the tax legislation of a country in which he or she has a relevant economic or personal interest. In particular, among other cases, a natural person is considered to be resident in Spain for tax purposes if he or she stays in Spain for more than 183 days per calendar year, whether continuous or interrupted. The law does not provide for any exceptions to this calculation, so that the days on which the person is in Spain due to quarantine, cancellation of international flights or hospitalisation, i.e. involuntary, must also be taken into account.

Some countries, such as the United Kingdom, Ireland and Australia, have made it clear that they will not take into account the time spent on their territory as a result of the COVID-19 crisis when determining the tax residence of a natural person. To date, the Spanish tax authorities have not taken a position on this matter, nor has any derogation been granted to exclude the days of forced residence due to circumstances of force majeure such as those mentioned above from the calculation.

If the extension of the restrictions on the free movement of persons results in a person being considered resident for tax purposes in Spain in 2020 and also being resident for tax purposes in another state, the tie-breaker rules provided for in the applicable double taxation convention must be applied, which will resolve the dispute in favour of one of the two states. If a corresponding applicable convention exists, one can only be resident for tax purposes in one of the two countries. Most treaties lay down five criteria that are applicable in succession (i.e. one moves on to the next only if it is not possible to determine tax residence on the basis of a priority criterion). Thus, an individual will be resident for tax purposes in the state in which he has a permanent residence; otherwise in the state with which he has the closest personal and economic ties (centre of vital interests); otherwise in the state in which he habitually resides; otherwise in the state of which he is a national. If the question cannot be resolved on the basis of the above criteria, the states must determine the tax residence by mutual agreement.

Suppose a natural person resident for tax purposes in state A was surprised by the quarantine order in state B, where he or she was temporarily staying for professional or private purposes, and, as a result of the extension of the extraordinary measures, is now considered resident for tax purposes under the national rules of state B because he or she spent the minimum number of days applicable in that state. The conflict is usually resolved by using the criterion of permanent residence, as it is unlikely that the person will have permanent residence in state B (e.g. for a hotel or hospital stay). However, it should be borne in mind that a home rented for a certain period of time in state B would prevent this criterion from being taken into account if the person has other homes in state A, which is likely. In such a case, the criterion of the centre of vital interests will in all likelihood be interpreted in favour of state A, as it can be assumed that the person will not have sufficient personal and economic ties with the other state.

Another scenario is also conceivable: a person who normally resides in state A (where he or she is considered resident for tax purposes) for a number of years for professional purposes decides, as a result of the COVID-19 crisis, to return temporarily to his or her home state B of which he or she is a national in order to work from there and return to state A once the pandemic has ended. State B could consider the person as tax resident, which would require the application of the tie-breaker rules of the convention.

We must assume that these expatriate workers will have residences in both states, so the former criterion will not be helpful in resolving this conflict. Nor will the criterion of the centre of vital interests help, as it is not unusual for economic and personal interests to be located in different states. Therefore, tax residence must be determined in favour of the state in which the person usually resides. This question cannot be resolved simply by comparing the number of days spent in the various states, but, according to the communication from the OECD General Secretariat "Analysis of Tax Treaties and the Impact of the COVID-19 Crisis", must be determined taking into account the frequency, duration and regularity of the person's routine residence. Obviously, a stay caused by a situation of force majeure such as that of COVID-19 does not fit into this criterion, so that the period to be examined to establish the habit should be extended if necessary. A change of location caused by the pandemic cannot therefore be considered habitual.

In any event, it is advisable that persons who are forced to remain in a country other than the one in which they are resident for tax purposes during the COVID-19 crisis keep the evidence of the exceptional nature of their stay (such as flight cancellations, detention orders or proof of hospitalisation) so that they can, if necessary, prove it to the tax authorities of that country.

In conclusion, in the absence of any criterion from the Spanish tax authorities on the effects of the COVID 19 crisis on the tax residence of individuals, an individual examination is necessary in order to assess, in the specific case, the risks of the occurrence of a situation of double taxation and to find appropriate solutions to avoid it.

Date: 09.04.2020