No Personal Income Tax (IRPF) exemption if work abroad is performed for a Spanish company

The Directorate General of Taxes (DGT) has clarified a fundamental aspect regarding the application of the exemption for work performed abroad within the scope of Personal Income Tax (IRPF). The controversy centered on whether the mere fact of performing the physical activity outside national territory allowed access to the tax benefit.

What the DGT has ruled

The query concerned the applicability of the exemption regulated in Article 7 p) of the Personal Income Tax Law (LIRPF) for crew members of vessels operating in international waters or third-country waters. The core of the matter was to determine whether the geographical location of the work was the sole requirement for the exemption.

The DGT has ruled that the exemption is not applicable in this scenario. The criterion establishes that, for this tax benefit to be applicable, the work must be performed for a company or entity that is not resident in Spain, or for a permanent establishment abroad. In the case analyzed, since the employing entity is a Spanish company, the requirement that the entity receiving the services be a non-resident is not met.

What this means for you

This ruling has a direct impact on both companies and workers resident in Spain:

• For companies: Those companies headquartered in Spain cannot apply the work abroad exemption to their employees, even if the activity is carried out entirely outside the country.
• For workers: Employees who perform their duties abroad, but whose employment relationship is with an entity resident in Spain, must pay tax on the totality of their earnings without the possibility of applying this specific reduction.

The determining factor is not the physical location of the worker, but rather the tax residence of the entity that employs them.

What should be done

It is necessary to analyze the structure of the employment relationship and the tax residence of the employing entity before applying any reduction for work performed abroad. Since the regulations require strict compliance with the requirements of the LIRPF and the RIRPF, each situation must be evaluated individually to determine whether the entity receiving the services meets the non-residency condition required by law.