Spain: Tax benefits for flexible remuneration plans

Law 35/2006, of 28 November of Personal Income Tax, establish in article 7 paragraph p) (hereafter  “Article 7.p”), the exemption for the income received by employees for services actually provided abroad. The exemption can reach up to 60,100 € of the taxable base of the employee, being able to reach in certain cases 82,100 €.

From the perspective of a company that hires an employee who travels abroad, the implementation of Remuneration Plans is a clear competitive advantage, since they will be able to attract and retain more talent thanks to a net salary higher than what is perceived in other countries. Among the kind of works carried out abroad, there are: i) the works provided for clients, within the framework of a transnational provision of services and (ii) those rendered in favour of related companies.

The international mobility of employees requires an accurate tax and labour technique that generates benefits and legal certainty to the parties, in order to minimise the impact of high tax rates.

Labour and tax advisors have been able to observe that it is essential to plan the fulfilment of the requirements demanded by Article 7.p, emphasising the services actually provided; the Foreign Tax Policy Dossier and the Business Compensation Plan.

In particular, the diverse controversial requirements for the application of the exemption require prior commercial, tax and labour advice. The main aspects to be considered are the following:

• the tax residence of the employee;
• work rendered abroad, that is, an effective displacement of the employee;
• the existence of a Double Taxation Agreement in the country in which the services are provided; and
• that the work done generates added value to the company receiving the services.

In this way, companies that effectively provide services abroad, and which are able to generate added value in the international market to companies residing abroad, can promote an international quality expansion, sustainable and profitable, by means of a better remuneration to its employees and managers, but without increasing payroll costs.

The business policy of Article 7p and the recent rulings of the Supreme Court require that companies should rule and adapt their compensation plans for displacements of employees and managers, in order to acquire greater effectiveness and efficiency both fiscal and labour.

For more information on these articles or any other issues involving labour and employment matters in Spain, please contact Iván Suarez (Partner) of Suárez de Vivero at isuarez@suarezdevivero.com or visit www.suarezdevivero.com.