The new double taxation treaty between Spain and the United States explained
The brand-new double taxation treaty between Spain and the US aspires to exponentially improve and facilitate mutual investments between countries. The purpose of a tax treaty is to contain international double taxation through tax reductions or exemptions. For Spain in particular, it will represent regaining the upper-hand in comparison with other European countries who now benefit from far more modern conventions with better conditions.
Understanding the US-Spain Income Tax Treaty
Nearly 30 years after the approval of the current Double Taxation Treaty (hereinafter “DTT”) between Spain and the United States, and after 6 years of complex negotiations and vetoes by Sen. Rand Paul (R), the United States Senate has finally passed the bill ratifying the DTT, which will enter into force on November 27th 2019.
The DTT introduces important developments and improvements with regards to the exchange of information between countries, thus improving and stimulating investments on both ends. This is particularly relevant for Spanish mother companies with subsidiaries in the United States, whom up to date have found themselves upon a clear competitive disadvantage with respect to other parent undertakings on other European countries.
The most important developments set out on the double taxation treaty between Spain and the US are as follows:
- Concept of Permanent Establishment: A building site or construction or installation shall only be considered a permanent establishment if it lasts more than 12 months, compared to the current 6 months.
- Dividends: Both the maximum taxation at source limit and the participation percentage for it to apply have been reduced significantly. Hence, dividends distributed by subsidiaries residing in a Contracting State (hereinafter “CS”) to the mother company resident in the other CS may be taxed at a maximum rate of 5% (compared to the current 10%), as long as the latter holds at least 10% (compared to the current 25%) of the former’s shares. In all other cases, the maximum taxation at source shall be 15%.
- Notwithstanding, when the mother company holds more than 80%, directly or indirectly, of its subsidiary’s shares for a period exceeding 12 months, taxation at source will be totally exempt.
- Moreover, the concept of pension funds is properly introduced, establishing that dividends received from a pension fund located in a CS shall not be subject to taxation at source.
Moreover, the concept of pension funds is properly introduced, establishing that dividends received from a pension fund located in a CS shall not be subject to taxation at source.
- Interests: Full exemption applies to interests paid from a resident in one CS to a resident in the other CS, provided the underlying loan is not considered contingent, in which case, taxation at source may not exceed 10%.
- Royalties: Full exemption will apply to royalties, therefore closing the door to the endless discussions between countries on taxation on technology import/export.
- Capital gains: Mutual exemption at source will apply to capital gains obtained for the transfer of shares/stocks, unless such transfer implies an underlying transfer of real estate (i.e. real estate holding companies). It represents a clear improvement in comparison to the current DTT as it establishes the possibility to tax any capital gain resulting from the transfer of shares if a participation over 25% for a period exceeding 12 months is held.
- Improvements on conflict resolutions: And last but not least, a major improvement in the new DTT is the establishment of an arbitration procedure as the go-to tool towards the resolution of conflicts emerging from an incorrect taxation by a CS. Such measure is in line with the ever-growing Spanish tendency to include ADRs in its conventions (see DTT Spain-Switzerland and DTT Spain-United Kingdom).
At LaWants we are backed by years of experience and expertise working with more than 18 countries between Latin America and the United States to assure the success of international business projects. Please do not hesitate to contact any of our professionals if you wish to know more about how to begin and develop your international project.