The Spanish Supreme Court sets the value of a foreign tax residence certificate issued for treaty purposes (STS 778/2023)

The Third Chamber of the Spanish Supreme Court, in judgment no. 778/2023 of 12 June (cassation appeal 915/2022, Judge Rapporteur Córdoba Castroverde), sets out its doctrine on the value of a tax residence certificate issued by another State for the purposes of a double taxation convention. The Spanish tax authorities and courts may not assess the circumstances in which the certificate was issued or disregard its content. Its validity is presumed and its production requires a residence conflict to be recognised and resolved under the convention’s own tie-breaker rules.

The judgment adds a relevant point. The “centre of vital interests” in article 4.2 of the convention is not equivalent to the “core of economic interests” in article 9.1.b) of Law 35/2006 of 28 November on Personal Income Tax (LIRPF): the former is broader, because it also covers the taxpayer’s personal relations.

The legal framework

Article 9.1 LIRPF sets the criteria under which individuals are treated as tax resident in Spain. Under letter (a), a person is resident if they spend more than 183 days in Spain during the calendar year, sporadic absences being counted unless tax residence in another country is proven. Under letter (b), a person is also resident if “the main core or base of their activities or economic interests, directly or indirectly” lies in Spain (our translation). The provision adds a rebuttable presumption based on the residence in Spain of the spouse not legally separated and of dependent minor children.

Article 4 of the convention —in this case, the Spain–United States convention of 22 February 1990, although the doctrine can be extended to any convention worded along the lines of the OECD Model— works on two levels. Paragraph 1 defines a resident by reference to each State’s domestic law, so the same person may be resident in both. Paragraph 2 resolves that conflict through successive tests: (i) a permanent home available; (ii) closer personal and economic relations, the so-called centre of vital interests; (iii) habitual abode; and (iv) nationality. Ultimately, the competent authorities settle the question by mutual agreement.

As regards evidence, the Court relies on Order EHA/3316/2010, approved for the non-resident income tax forms. This order requires a certificate issued by the relevant tax authority “which must expressly state that the taxpayer is resident within the meaning of the Convention” (our translation).

The case

Mr Artemio, a dual Moroccan and US national, single and without children, was a financial adviser to the Vickers Group, an international investment fund domiciled in the Cayman Islands. The Las Palmas Regional Inspection Unit, part of the Canary Islands Special Delegation of the Spanish Tax Agency (AEAT), assessed his personal income tax for 2008, 2009 and 2010, with a tax debt of EUR 3,615,106.43.

The inspectorate considered his residence in Spain established under article 9.1.b) LIRPF, on the basis of a broad set of indications: registration on the municipal roll of San Bartolomé de Tirajana since 2002; four homes in Spain with an aggregate cadastral value of almost EUR 1 million; six vehicles with high-value historic registration plates; between three and five bank accounts in Spain, into which he received monthly transfers of around EUR 25,000 from the Vickers Group; contact addresses in Gran Canaria in his dealings with third parties; and stays in Spain of 56, 63 and 91 days in the three years, compared with 12, 3 and 7 days in Morocco.

During the audit, the taxpayer had produced Moroccan certificates. Later, in the administrative appeal and court stages, he produced three certificates from the US Treasury Department’s Internal Revenue Service, one for each year, stating that the taxpayer “is a resident of the United States of America within the meaning of the income tax convention between the United States and Spain” (our translation).

The Fourth Section of the Contentious-Administrative Chamber of the National High Court (Audiencia Nacional), in a judgment of 10 November 2021 (appeal 3/2018), dismissed the appeal. It considered that the US certificate is issued “to every US national merely by virtue of being one” and that, although it was “an indication in favour of tax residence in that country”, it was “insufficient to rebut the body of data set out in detail by the inspectorate” (our translation). It therefore found no residence conflict.

The questions referred

The order admitting the appeal, of 20 July 2022, raised four questions: whether the certificate may be disregarded; whether its validity must be presumed; whether the conflict must be resolved under the convention’s rules interpreted autonomously, including whether the centre of vital interests is equivalent to the core of economic interests; and whether merely holding assets in Spain that generate no income is enough for article 9.1.b) LIRPF.

The Court answers the first three and declines to set doctrine on the fourth, because the interpretation of article 9.1.b) depends on the evidence in each case and “no doctrine of general scope can be established” (our translation).

The Supreme Court’s doctrine

The Court starts from the fact that the certificate meets the two relevant conditions: it is issued by the competent authority of the other State and expressly states that it is issued for the purposes of the convention. In that case, “the national administrative or judicial bodies were not competent to assess the circumstances in which a tax residence certificate had been issued by another State, nor, consequently, could they disregard the content of a tax residence certificate issued by the tax authorities of a country that has signed a Convention with Spain, where that certificate is issued for the purposes of the Convention, since that would contravene article 96 of the Constitution and articles 1.1, 1.2 and 4.1 of the Convention” (our translation). The National High Court’s view that the certificate is issued to any US national was, in the Court’s words, “devoid of any reasoning”.

The second conclusion, set out in Legal Ground Four (FJ 4), follows from this: “for the purposes of analysing whether there is a residence conflict between two States, the validity of a residence certificate issued by the tax authorities of the other Contracting State within the meaning of the Double Taxation Convention must be presumed, and its content may not be rejected, precisely because that Convention has been signed” (our translation).

Thus, where the inspectorate treats the taxpayer as resident in Spain under article 9 LIRPF and the taxpayer produces a certificate from the other State issued for treaty purposes, the analysis does not end with domestic law. There are two residences and the conflict must be resolved under the convention. The Court relies on its judgment of 4 July 2006 (appeal 3400/2001), which had already held that the tie-breaker rules must be applied where the person concerned produced a certificate showing dual residence.

The third conclusion concerns the interpretation of those rules: “the ’tie-breaker’ rule in article 4.2 of the Convention, consisting of the ‘centre of vital interests’, is broader than the concept of ‘core of economic interests’ in article 9.1.b) of the Personal Income Tax Act, and is therefore not equivalent to it” (our translation). The Court relies on Commentaries 14 and 15 on article 4 of the OECD Model, under which the centre of vital interests is determined by reference to family and social relations, occupations, political, cultural or other activities, the place of business or professional activities and the place from which property is administered, “circumstances that must be examined as a whole”. Since the concept also covers personal relations, it cannot be interpreted in the light of article 9.1.b) LIRPF, which is limited to economic ones.

The ruling upholds the appeal, sets aside the judgment and sends the case back so that the National High Court, starting from the existence of the conflict, resolves it under article 4.2 of the convention.

The Moroccan certificates

One detail of the case deserves clarification. The inspectorate had rejected the Moroccan certificates because they were issued not by the tax authority but by the Ministère des Finances et de la Privatisation. The Court does not examine them, because only the three IRS certificates were relied on in the cassation appeal. The judgment therefore says nothing about the value of a certificate issued by a body other than the tax authority, although its reasoning requires the certificate to be issued by the competent authority.

Our assessment

In our view, the judgment changes the way these cases are approached. In cases such as this one, the tax authorities and the lower court had treated the certificate as a mere indication, which could give way to a solid body of data on assets and income in Spain. The Court gives it a qualified value: produced in the terms of the convention, it requires the conflict to be recognised and resolved under the treaty rules.

That said, the judgment does not hold that the certificate alone determines residence in the other State. What it holds is that producing it opens the conflict. Which of the two States prevails remains a matter of evidence under the successive tests of article 4.2, which is why the Court sends the case back to the National High Court without prejudging the outcome.

The autonomous concept of centre of vital interests also has evidential consequences. The taxpayer in this case had no close family, which the Central Economic-Administrative Court (TEAC) had already noted as a difficulty in locating his personal ties. Article 4.2 allows social relations, cultural or other activities and the place from which property is administered to be taken into account, so the evidence is not limited to where the assets are located.

Practical consequences

Anyone claiming residence in another State should obtain each year a tax residence certificate from that State’s tax authority, expressly stating that it is issued for the purposes of the convention. In this case, the certificates were produced only at the administrative appeal stage and the Court accepted them; obtaining them contemporaneously remains, however, the most prudent practice.

It is also advisable to gather evidence of personal, social and professional relations in the claimed State of residence, not only economic ones. That evidence will be the basis for resolving the conflict under article 4.2 once it has been opened.

Finally, the judgment does not prevent the tax authorities from finding, at the domestic level, that the taxpayer has the core of their economic interests in Spain; it prevents that finding from displacing the certificate. Interposing companies does not by itself exclude the article 9.1.b) test, which also looks at economic interests held “directly or indirectly”.