We got Spanish licences last year on the basis of the following information. EU licences, as far as I understand it, are OK in Spain but they must be valid. In order to be valid they must be up to date and that includes the photocard. When you move house (in or out of the UK) you are obliged to tell the DVLC your new address, the DVLC will not accept a foreign address. Your address must be your place of residence not a friend or family member address.
This appears to translate to the following rules for those RESIDENT in Spain
If you move permanently to Spain you can go on using your UK (EU) licence but you should take it at the Commisaria de Police to register your new residential address.
Once the licence or photocard come up for renewal you should get a Spanish licence as you have no residence in the UK for the renewal.
If you don’t do that your licence isn’t valid and should you have an accident you may provide your insurance company with the excuse they need to deny your claim.
Also - don’t think the DVLC won’t know. My husbands licence came up for renewal before mine and he got a Spanish one, we presume the reminder to our old address was sent back ‘no longer at this address’. When, six months later, mine came up for renewal the DVLC sent a renewal notice to the address of a friend of mine, DVLC had got it from our bank!. Big brother is watching.
The process isn’t as bad as people make out though it is a bit costly. A medical at a local health centre, blood pressure, medication questions, sight and hearing tests and a sort of computer game reflex test. Then everything to our gestor who got us a temporary licence from ‘taffico’ until the new one came. We think worth it for peace of mind. We are both in our sixties and the new licence is valid until we are seventy.
And in summer last year Traffico insisted that we have the health check to get the Spanish licence - although our Gestor said if we had had more time left before the renewal date for the photocard they ‘may’ not have done.