The Spanish Supreme Court closes the door on AEAT: a tax residence certificate issued by another State under a tax treaty cannot be displaced by domestic circumstantial evidence

The Third Chamber of the Spanish Supreme Court, in judgment no. 778/2023 of 12 June (appeal no. 915/2022, rapporteur Ms Córdoba Castroverde), closes the door on the administrative and judicial practice under which a tax residence certificate issued by another State under a tax treaty could be displaced, by means of circumstantial evidence, in favour of the internal assessment of the criteria of article 9.1 of the Spanish Personal Income Tax Act (LIRPF). The doctrine set out in the Fourth Ground of the judgment reorganises the evidential framework of the residence conflict and restores to the tax treaty the hierarchical position that article 96 of the Spanish Constitution reserves for it: AEAT and the Spanish courts are not competent to assess the circumstances under which the certificate was issued; its validity is presumed; its production triggers recognition of a residence conflict; and the resolution of that conflict must follow the tie-breaker rules of the treaty itself. As a corollary, the centre of vital interests of article 4.2 of the OECD Model Tax Convention is not assimilable to the core of economic interests of article 9.1.b) of the LIRPF: the former is a broader concept that also encompasses the contributor’s personal and social relations.

It is helpful to begin with the legislative framework, because the evidential architecture of the tax residence of the contributor with international ties rests on three planes that the judgment itself requires to be kept distinct.

Article 9.1 of the LIRPF establishes the domestic criteria for habitual residence in Spanish territory. Under sub-paragraph a), a contributor is deemed to reside in Spain when present for more than 183 days, during the calendar year, in Spanish territory, with sporadic absences counted in unless tax residence in another country is evidenced. Under sub-paragraph b), where Spain is the location of “the main core or base of his or her activities or economic interests, directly or indirectly”. The provision adds a rebuttable presumption based on the habitual residence in Spain of the non-legally separated spouse and of dependent minor children.

Article 4 of the tax treaty —in the case under review, the convention between Spain and the United States of America, signed in Madrid on 22 February 1990, although the doctrine extends to any treaty whose text substantially mirrors the OECD Model— articulates a two-tier system. In its paragraph 1, it defines “resident of a contracting State” by reference to the domestic legislation of each State, which admits the possibility that a single person may be characterised as resident by both jurisdictions. In its paragraph 2, faced with that eventuality, it deploys a sequence of tie-breaker criteria: (i) permanent home available; (ii) closer personal and economic relations, identified as centre of vital interests; (iii) place where the contributor habitually lives; (iv) nationality; and, as a last resort, mutual agreement between competent authorities.

Order EHA/3316/2010, on the evidential plane, requires that a foreign tax residence certificate, in order to qualify for treaty purposes, must be expressly issued by the tax authority of the other State and must expressly state that it is issued “for the purposes of the Convention”. This formal clause —that the certificate be issued under the treaty— is the key that activates the doctrine now under examination: a certificate issued for other purposes, or a document issued by an authority other than the competent tax authority of the other State, does not benefit the contributor in the terms the judgment establishes.

The case under review precisely matches the typical pattern of the contributor with international ties and significant real-estate assets in Spain. Mr Artemio, a dual national of Morocco and the United States, single and without children, financial adviser to the Vickers Group —an international investment fund domiciled in the Cayman Islands— was reassessed by the Regional Inspection Branch of Las Palmas, Special Delegation of the Canary Islands of AEAT, for personal income tax for fiscal years 2008, 2009 and 2010, with an additional tax liability of EUR 3,615,106.43. The inspection considered Spanish tax residence established through article 9.1.b) of the LIRPF, on the basis of an extensive circumstantial picture: registration on the municipal census of San Bartolomé de Tirajana since 2002; ownership of four residences in Spain with an accumulated cadastral value close to one million euros; ownership of six high-value vintage-plate vehicles; between three and five bank accounts in Spanish territory, with monthly transfers of approximately EUR 25,000 from the Vickers Group; repeated designation of contact addresses in Gran Canaria in dealings with third parties; and presence in Spain of 56, 63 and 91 days in each of the three fiscal years under review —against 12, 3 and 7 days, respectively, in Morocco.

The contributor produced, before the Central Economic-Administrative Tribunal (TEAC) and the National High Court, three tax residence certificates issued by the United States Internal Revenue Service of the Department of the Treasury, one for each fiscal year, expressly stating that they were issued “for the purposes of the Convention on Income Taxation between the United States and Spain”. The Fourth Section of the Contentious-Administrative Chamber of the National High Court, by judgment of 10 November 2021, dismissed the contentious-administrative appeal, considering that the US certificates constituted “a circumstantial element in favour of tax residence in that country” but “insufficient to displace the body of data which the inspection has set out in detail”, and concluded that no residence conflict required recourse to the tie-breaker rules of article 4.2 of the treaty.

The question put to the Supreme Court in the admission order of 20 July 2022 was set out in four cassation points concerning the probative value of the certificate, the presumption of its validity, the autonomous nature of the tie-breaker rules, and the equivalence or otherwise of the centre of vital interests with the core of economic interests.

The Supreme Court’s response is articulated on three pillars that warrant separate treatment, because each contributes an operative key.

First, the lack of competence of the domestic administrative and judicial bodies to assess the circumstances under which the foreign certificate was issued. The Court puts it directly: “the domestic 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 with which Spain has entered into a Convention, where that certificate is issued for the purposes of the Convention, since to do so would contravene article 96 of the Spanish Constitution and articles 1.1, 1.2 and 4.1 of the treaty”. The doctrine directly corrects the assessment of the National High Court, which had taken the view that the US certificate was issued “to any US national merely by virtue of nationality”. Such a value judgment, beyond being legally unfounded, exceeds the competence of the domestic court: the decision on who is a US tax resident, for treaty purposes, falls to the Internal Revenue Service and not to the Spanish bodies.

Second, the presumption of validity of the certificate and its effect on the recognition of the residence conflict. The Court holds: “for the purpose of analysing the existence of a residence conflict between two States, the validity of a residence certificate issued by the tax authorities of the other contracting State in the sense of the Tax Treaty must be presumed, and its content may not be rejected, precisely because that Treaty has been entered into”. The procedural consequence is significant: where the Spanish tax authority —exercising its inspection power— treats the contributor as a Spanish tax resident under article 9 of the LIRPF, and simultaneously the contributor produces a foreign tax residence certificate issued under the treaty, the domestic assessment of residence does not exhaust the analysis: the concurrence of both characterisations requires recognition of a conflict and its resolution through the treaty. The Supreme Court thus revives its own doctrine laid down in the judgment of 4 July 2006 (appeal no. 3400/2001), which considered it mandatory to apply the tie-breaker rules where the interested party produces a tax residence certificate that permits the affirmation of dual residence for treaty purposes.

Third, the autonomous nature of the tie-breaker rules of article 4.2 of the treaty and the non-equivalence of the centre of vital interests with the core of economic interests of article 9.1.b) of the LIRPF. The Court holds: “the ’tie-breaker’ rule of article 4.2 of the Treaty, consisting of the ‘centre of vital interests’, is broader than the concept of the ‘core of economic interests’ of article 9.1.b) of the Personal Income Tax Act, and is therefore not assimilable to it”. The reasoning rests on Commentaries 14 and 15 to article 4 of the OECD Model Tax Convention on Income and Capital: the centre of vital interests is defined by the contributor’s family and social relations, occupations, political, cultural or other activities, the location of business or professional activities, the seat of administration of wealth, “circumstances that must be examined as a whole”. The projection of the concept onto personal relations —not only economic ones— prevents its interpretation in the light of the Spanish domestic legislation, which limits the scope of article 9.1.b) of the LIRPF to wealth and economic activity.

In our view, the doctrine laid down by the Third Chamber reorganises the administrative practice in a matter particularly sensitive to the contributor with international ties and assets in Spain. The previous AEAT practice in relation to profiles analogous to the one under review —holders of significant real-estate assets in Spain, without declared tax residence, with professional ties and income in foreign jurisdictions— rested on a solid circumstantial picture under article 9.1.b) of the LIRPF, against which the foreign certificate was relegated to the status of a mere additional indicator. The judgment displaces that logic by introducing an evidential hierarchy that gives the certificate qualified value: once produced in the terms of the treaty, it compels recognition of the conflict and the application of the conventional rules of resolution, with an autonomous and broader concept of the centre of vital interests.

Subject to the above, the doctrine signals three operative caveats that warrant separate retention.

First, on the formal requirements of the certificate. The Court’s doctrine operates only where the certificate meets two conditions: first, that it be issued by the competent tax authority of the other State —not by any administrative body, however close its connection to the Ministry of Finance of the issuing country; and second, that the certificate expressly state, in the terms of Order EHA/3316/2010, that it is issued “for the purposes of the Convention”. The case of STS 778/2023 illustrates the point: the Moroccan certificates produced by Mr Artemio, issued by the Ministère des Finances et de la Privatisation and not by the tax authority proper, were not even taken into consideration by the judgment, which confined its analysis to the three certificates issued by the US Internal Revenue Service.

Second, on the scope of the doctrine. The judgment does not hold that the foreign certificate under the treaty determines, on its own, tax residence in the other State for all purposes: what it holds is that its production compels recognition of a residence conflict and its resolution by the treaty rules. The specific outcome —which of the two States is ultimately competent to tax the contributor’s worldwide income— remains a factual question to be answered by reference to the successive criteria of article 4.2 of the treaty. The judgment, in its Fifth Ground, orders the case to be remitted to the National High Court precisely so that it may resolve the conflict in accordance with article 4.2 of the treaty, without prejudging the outcome.

Third, on the autonomous concept of the centre of vital interests. The projection of the concept onto personal and social relations —in addition to economic ones— broadens the factual basis on which the contributor may rely to establish residence in the other contracting State. In the case under review, the contributor —single and without children— had no close family unit, which the TEAC had already recognised as a difficulty in tying personal residence to a specific country. However, the concept of article 4.2 of the treaty allows the consideration of social relations, circle of friends, cultural or sporting activities, membership of clubs or institutions, habitual residence of close persons not integrated into the nuclear family unit, as well as the seat of administration of wealth. The contributor’s evidential file must therefore be built on a broader basis than the mere location of real-estate assets.

The practical consequence is highly relevant for the planning of the contributor with international ties.

It is advisable, in the first place, to obtain contemporaneously the tax residence certificate of the alleged State of residence, issued by the competent tax authority and expressly stating that it is issued “for the purposes of the Convention” in the terms of Order EHA/3316/2010. The certificate must be obtained annually, throughout the period during which tax residence in the other State is to be maintained. Late production, or production referring to periods after the close of the fiscal year under review, may be insufficient, depending on the circumstances, to activate the doctrine; the certificate should, as far as possible, be contemporaneous with the fiscal year in question.

It is advisable, in the second place, to build an evidential file on the centre of vital interests that comprises personal, social and cultural relations, in addition to economic ones. The Supreme Court’s doctrine shifts the debate from the assets in Spain to the contributor’s network of personal ties in the alleged State of residence. Documentation of extended stays in the other State, membership of clubs, associations and professional organisations, ties to cultural or sporting centres, network of friends evidenced through correspondence and contractual relationships with personal service providers (doctors, lawyers, advisers) —all of this reinforces the attribution of the centre of vital interests to the other State and offsets the asset presence in Spain.

It is advisable, in the third place, to structure the contributor’s real-estate and movable investment in Spain so that it does not present as the main core of the contributor’s activities. The Court’s doctrine does not prevent AEAT from considering, on the domestic plane of article 9.1.b) of the LIRPF, that the contributor has in Spain the main core or base of his or her activities or economic interests; what it prevents is that this domestic assessment displaces the foreign certificate under the treaty. However, the structuring of the real-estate investment through non-resident vehicles, the outsourcing of wealth administration to entities located outside Spain, and the clear documentation of the passive nature of the holding —holiday home, investment not used in business activities— mitigate the exposure profile under article 9.1.b) of the LIRPF and, in return, reinforce the attribution of the centre of vital interests to the other State.

In conclusion, what this judgment of the Third Chamber of the Supreme Court makes clear is that the Spanish administrative and judicial practice in matters of tax residence of the contributor with international ties —which tended to displace the foreign certificate under the treaty through the circumstantial route of article 9.1.b) of the LIRPF— is incompatible with the hierarchical position of the treaty itself and with the evidential regime that it establishes. AEAT and the Spanish courts are not competent to assess the circumstances under which a foreign certificate was issued; its validity is presumed; its production compels recognition of a residence conflict and its resolution by the rules of article 4.2 of the treaty; and the centre of vital interests of the treaty, broader than the core of economic interests of domestic legislation, is not assimilable to it. The doctrine opens a clear procedural channel for the diligent contributor who builds an evidential file on the basis of a contemporaneous foreign tax certificate issued under the treaty and of a broad evidential picture of personal and social relations in the alleged State of residence. For the boutique planning of the private-client contributor with assets in Spain, the judgment is a first-rate tool.

Sources

• Spanish Supreme Court, Contentious-Administrative Chamber, Second Section, judgment no. 778/2023 of 12 June 2023, cassation appeal 915/2022, rapporteur Ms María de la Esperanza Córdoba Castroverde, ECLI:ES:TS:2023:2735: www.poderjudicial.es.
• Spanish Supreme Court, Contentious-Administrative Chamber, judgment of 4 July 2006, cassation appeal 3400/2001 (precedent expressly invoked by STS 778/2023 on the mandatory application of the tie-breaker rules of the tax treaty upon production of a foreign tax residence certificate).