Spanish companies shall not withhold Personal Income Tax (IRPF) from employees of their Saudi parent company

The application of double taxation treaties is key to determining Spain's taxing power over employment income. Recently, the Dirección General de Tributos (DGT) has specified the scope of the withholding obligation when workers from a parent company located in Saudi Arabia provide services temporarily in Spanish territory.

What the DGT has resolved

The resolution is based on Article 15 of the Convention between Spain and Saudi Arabia. According to this provision, employment income is only taxed in Spain if the employment is physically exercised in the country. However, the treaty establishes an exception that allows income to be taxed solely in the country of origin (Saudi Arabia) if three simultaneous requirements are met:

• The stay in Spain must be less than 183 days in a twelve-month period.
• The remuneration must be paid by an employer who is not a resident in Spain.
• The income must not be borne by a permanent establishment that the employer has in Spain.

In this sense, the DGT determines that if the Spanish entity is not the true employer of said workers, there is no obligation to act as a withholding agent for their salaries in Spain.

What this means for you

For companies with international structures, this criterion delimits fiscal responsibility regarding the mobility of personnel from their parent companies or foreign groups. If workers from a Saudi entity perform temporary services in Spain but their employment relationship and salary payments depend exclusively on the parent company, the Spanish company is not obliged to practice withholdings for Non-Resident Income Tax (IRNR).

What should be done

It is fundamental that the reality of the employment relationship coincides with the contractual structure. The DGT warns that if the reality of the facts indicated that the Spanish company acts as the true employer, the treaty exception would no longer be applicable. In that case, the income could be taxed in Spain and the Spanish entity would have the obligation to withhold. Therefore, it is necessary to verify that the payment of payrolls and the management of the employment relationship remain outside the Spanish jurisdiction to avoid tax contingencies.