The Spain-United States of America Double Taxation Treaty

The Spain-United States of America Double Taxation Treaty was approved last in July 2019 by the U.S Treasury Department. The Spain-United States Double Taxation Treaty has been in force since the 27th of November 2019.

The now-amended Treaty is originally dated from 2009 and its amendment was negotiated 6 years ago. Spain concluded their internal process of ratification in 2014, but, as stated, the UNITED STATES OF AMERICA did not complete their process until last summer.

The new Treaty favours both countries as reciprocal investment destinations. Before this Treaty, American investors arrived in Spain through interposed structures (creation of holding companies in Holland or Luxembourg, EU countries with better fiscal conditions).

However, with this new Treaty, it will no longer be necessary for U.S investors to use this type of investment structure.

The importance of commercial transactions between Spain and the US:

To understand the importance of these commercial transactions, we should look at the data published by ICEX:

• In 2018, the UNITED STATES OF AMERICA was Spain’s main trading partner, outside of the EU.
• In 2018, the UNITED STATES OF AMERICA was the 6th destination of Spanish goods export, representing 4.5% of the total.
• In 2018, the UNITED STATES OF AMERICA was Spain’s 5th supplier, with 4.1% of the imports coming from there.
• The UNITED STATES OF AMERICA was the first investor in Spain in 2017 (latest year available). In terms of stock, with 16.4% of the total.
• In 2017, the UNITED STATES OF AMERICAA was the second destination for Spanish investment, with 15.5% of the total.
• Spain’s investment position in the UNITED STATES OF AMERICA is now close to 73 billion euros.
• Between 2014 and 2018, Spanish companies have contracted works and services in the UNITED STATES OF AMERICA with an approximate value of 34,432 million euros.

Content of the new Treaty:

Below, we provide direct access to the content of the Treaty in Spanish and English:

• BOE publication
• S Treasury Department Publication

What should be taken into account when amending the Treaty?

Now, we highlight a series of amendments introduced in the Treaty, which we believe may be of interest:

1. Dividends (Provision 10):

Concerning the taxation of companies who are resident in contracting states, the general tax rate for the distribution of dividends is 15%. (Article 10.2.b). However, depending on the percentage of participation, it can be considerably reduced:

• If the share is at least 10%, therefore the tax is reduced to 5% (Article 10.2.a).
• If the share is 80% in principle, there will be no taxation (Article 10.3).

2. Interests (Provision 11):

The term “interests” in the sense of this article means:

Income from credits of any kind, with or without a mortgage guarantee or the right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and lots attached to such securities, and any other income subject to the same tax system as income from capital lent by the tax legislation of the Contracting State from which the income derives. Income covered by Article 10 (Dividends) and penalties for late payment are not considered interests for this Article.

In general, interests are not taxed in the Contracting States. With any exceptions, according to the UNITED STATES OF AMERICA internal regulations (Article 11. 1 and 2).

3. Fees (Provision 12):

Similar to interests, they are also not subject to be taxed.

The term “fees,” generally refers to the profits received from the exploitation of industrial and intellectual property rights.

4. Capital Gains:

Both countries waive tax at source, capital gains from the sale of shares. (Unless such actions involve the right to the enjoyment of real estate) (Article 13)

5. Permanent Establishments:

The permanent establishments become tax-exempt for 12 months.

Article 5.3;

• A construction or installation project, a drilling facility or rig or a ship used for the exploration of natural resources constitutes a permanent establishment only when its duration exceeds twelve months or the exploration activity is prolonged to more than twelve months.”

6. Limitations of Benefit:

Article 17 is included as a clause of “limitation of benefits” in an objective sense. In other words, if each and every one of the requirements established in the Treaty are not fulfilled, then it does not apply.

In this sense, a “qualified resident” is one who meets all the requirements of the standard. By its extent, we do not reproduce the text of Article 17.

7. Amicable Conflict Resolution:

The new Treaty promotes conflict resolution between investors and contracting state, through arbitration.

As we stated at the beginning of this article, it is a very interesting Treaty for investors from both countries in their respective territories and the fact that it alleviates the double tax burden for international investments, logically, is always encouraging.

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