Exemption for work performed abroad
Article 7.p) of the Personal Income Tax Law regulates an exemption for earned income of up to €60,100 per annum, subject to compliance with certain requirements. This exemption is applicable to taxpayers who, while being Spanish tax residents, are effectively posted abroad to carry out a part of their work, provided – among other conditions – that such work benefits a foreign company.
The numerous interpretations made of these rules by jurists and the courts have helped to clarify how this exemption will apply in practice.
Mention should be made of the recent Supreme Court Judgment of October 20, 2016 which analyzed, among other issues, the impact of the exercising of stock options on such exemption. The case involved an employee who lived in France from October 2002 through to September 2005, having been hired by the French company of a US multinational group. She was then contracted by the Spanish company of the same group as from October 2005 and lived in Spain continuously through to 2007, which was the year in which she exercised the stock options granted to her while she was working in France.
It should mentioned, for the purposes of clarification, that the mere granting of stock options does not generate earned income, such income accruing instead when the employee exercise the options, thereby acquiring shares free of charge or at a lower-than-market price.
The Supreme Court concluded that although the stock options were granted when the employee worked in France for the benefit of the group’s French subsidiary, such income was not received in respect of work actually performed abroad, since it only accrued and was only received in 2007, when she had been residing in Spain exclusively for several years, having been on no foreign assignments over that period. Therefore, in the Court’s opinion, the exemption was not applicable even through the accrual of the stock options had indirectly been generated in France, since until they are actually exercised, such options represent merely the expectation of a right. The Court nevertheless validated the decision appealed against – in which the TEAC had confirmed that the exemption was applicable – so as not to generate a situation of reformatio in peius.
The impact of the exercising of stock options on the application of the exemption was also analyzed by the Directorate-General of Taxes in its ruling of December 2, 2015 (V3834-15). In that case, the application of the exemption was rejected, since the view taken was that it involved earned income deriving from a commercial relationship, given that the party involved was a member of the company’s board of directors and not an employee. This was based on the understanding, in accordance with the so-called “relationship absorption” theory, that the functions involved in the directorship and representation of a company are necessarily commercial rather than employee functions.
Garrigues Tax Law department
Garrigues Human Capital Services deparment