Spanish tax consequences deriving from Brexit

As a consequence of the Agreement of the UK’s withdrawal from the European Union, a transitory period was established up until December 31, 2020, during which the EU legislation has been kept in relation to the internal market, the customs union and the EU policies.

Unless there are last minute changes, from January 01 2021, the EU regulations will no longer apply in the relations between the EU and the United Kingdom. This will imply that all the movements of merchandise from or towards the United Kingdom will be subject to customs formalities and controls. Needless to say that the tax implications shall not be limited to customs duties or VAT but to a larger range of important taxes such as Corporation tax, Personal income tax or Non – residents income tax, that are worth knowing. Due to their extension, we focus our post today on these last two taxes.

Consequences In the area of Non – residents income tax:

  • The current exemption on interest, dividends and royalties applying to EU residents will no longer apply. Any exemption will result from the Double taxation agreement (DTA) signed by the two countries.
  • Spanish source income derived by UK tax residents (such as, for example, income deriving from a real estate property located in Spain) that can benefit from the deduction of expenses directly related to it, will be computed on a gross basis, as no expenses will be tax deductible.
  • The general tax rate applying on Spanish source income (except for the 19% rate applying on interest, dividends and capital gains) will be increased from 19% to 24%. However, this tax rates may be reduced according to the limits established in the provisions of the Spain / UK DTA.

Consequences in the area of Personal income tax:

  • If a taxpayer moves his / her tax residency to the UK, all income pending taxation will need to be imputed in the last fiscal year declared in Spain. It will not be permitted to elect filing a complementary return for the fiscal year of change, only when a relevant income is obtained, without any penalty, late payment interest or surcharge,
  • The possibility of deferring capital gains tax due to the change of tax residency will not be possible either, (in the situation known as the “Exit tax”).
  • The term required to compute capital losses deriving from the transfer of shares will be extended to one year.
  • CFC rules permit an exception to their application when the non resident entity is tax resident of a EU Member State, providing that it can be proven to have been set up for valid economic reasons and that it performs economic activities. With Brexit, this exception shall no longer apply.
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✔ In summary, the withdrawal of the UK from the EU will imply a higher taxation in several crossborder transactions which, up to now, have benefited from the EU regulations.

A consequences of the United Kingdom’s withdrawal from the European Union, from January 01 2021, the EU regulations no longer apply in the relations between the EU and the United Kingdom, (UK).

Now that Brexit is a reality, all the movements of merchandise from or towards the UK are subject to customs formalities and controls.

Impact of Brexit in the area of Value Added Tax, (VAT)

✔ The entry of merchandises from the UK into the Spanish VAT territory (mainland and the Balearic Islands) implies the mandatory payment of VAT at the time of the Customs import, except if the company elects to be subject to the VAT special import deferral payment scheme.

✔ Merchandise transported from the Spanish VAT territory to the UK shall qualify as exports and will be VAT exempt.

✔ However and with the purpose of avoiding double taxation, in so far as the transportation can be evidenced, merchandises transported from the UK to any of the 27 Member States prior to Jan. 01, 2021 and arriving at their destination after such date, will need to be presented at the Customs office but will not be subject to import duties as they will still be considred as inter community acquisitions.

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✔ The rules to determine which country’s VAT applies in the rendering of services shall remain the same as prior to Brexit. However, the special and complex use and enjoyment rule established in article 70 Two of Spanish VAT Law shall apply in the rendering of services to UK company clients, (as it may be the case of advisory, consulting or data processing services, for example). In such cases, these will be deemed to take place in Spain and will be subject to Spanish VAT when the service is utilised or effectively exploited by the UK customer in the Spanish VAT territory.

✔ Given that the transactions performed between Spain and the UK will no longer qualify as intercommunity transactions, they will no longer need to be reported in the recapitulative form 349.

✔ Spanish companies performing transactions with UK customers will no longer need to identify themselves with an intercommunity VAT number. Even so, whenever services are rendered or products are delivered to UK customers, it will be recommendable to check that the customer is acting as an entrepreneur in the relevant transaction.

✔ Companies established in the UK that acquire merchandises or services in the Spanish VAT territory and that may wish to ask for the VAT refund, will need to appoint a representative resident in the VAT territory. A reciprocity treatement will need to exist in the UK with respect to Spanish enterprises, except for certain cases such as the access, hotel, restaurant and transportation services related to the assistance to trade fairs, congressess and commercial / professional exhibitions that might take place in Spanish mainland and the Balearic Islands. Such limitations shall not apply to VAT paid prior to Jan. 01, 2021.

✔ In summary, despite the above rules are well known in transactions undertaken with non EU customers and / or suppliers, they will need to be cautiously observed from now on so as to comply with the currently existing rules in the Spanish / UK commercial transactions.


Publicado el 12-2020 por PBS