United States-Spain Tax Treaty
Quick Summary. Spain became a member of the European Union in 1986. Resident corporations are taxed in Spain on their worldwide income. Non-resident/non-established foreign companies are subject to tax on Spanish sourced income. Foreign companies with a permanent establishment are subject to tax allocable to the PE.
The Kingdom of Spain is a parliamentary democracy headed by a constitutional monarch. The country has a bicameral parliament, the General Courts or National Assembly, consisting of the Congress of Deputies (lower house) and the Senate (upper house). The country is comprised of 17 comunidades autónomas.
Spain and the United States have a Friendship, Navigation and Commerce (FCN) Treaty, and a Bilateral Taxation Treaty (1990), which was subsequently amended in 2013 and signed by Spain’s finance minister and the U.S. Ambassador to Spain.
In February 2020, Spanish regulations with respect to the value-added tax (VAT) system underwent revision related to Council Directive (EU) 2018/1910 of 4 December 2018 amending Directive 2006/112/EC.
In April 2020, Royal Decree Law (RDL) 15/2020, of 21 April 2020 provided for changes with respect to aspects of the assessment method for personal income tax and the VAT.
U.S-Spain Tax Treaty.
- Convention between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, together with a related Protocol, signed at Madrid on February 22, 1990
- PROTOCOL Amending the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and its Protocol signed at Madrid, on February 22, 1990
- Technical Explanation of the Protocol signed at Washington on January 14, 2013, the related Memorandum of Understanding signed the same day, and a subsequent Exchange of Notes dated July 23, 2013
Currency. Euro (EUR)
Common Legal Entities. Public limited company (SA), limited liability company (SL), and branches.
Income Tax Treaty between the United States and Spain
Tax Treaties. Spain is party to 93 tax treaties. Signatory to OECD MLI.
Spain has concluded bilateral investment agreements with: Hungary (1989), the Czech Republic (1990), Russia (1990), Azerbaijan (1990), Belarus (1990), Georgia (1990), Tajikistan (1990), Turkmenistan (1990), Kirgizstan (1990), Armenia (1990), Slovakia (1990), Argentina (1991), Chile (1991), Tunisia (1991), Egypt (1992), Poland (1992), Uruguay (1992), Paraguay (1993), Philippines (1993), Algeria (1994), Honduras (1994), Pakistan (1994), Kazakhstan (1994), Peru (1994), Cuba (1994), Nicaragua (1994), Lithuania (1994), South Korea (1994), Bulgaria (1995), Dominican Republic (1995), El Salvador (1995), Gabon (1995), Latvia (1995), Malaysia (1995), Romania (1995), Venezuela (1995), Turkey (1995), Lebanon (1996), Ecuador (1996), Costa Rica (1997), Croatia (1997), Estonia (1997), Panama (1997), Slovenia (1998), Ukraine (1998), the Kingdom of Jordan (1999), Trinidad and Tobago (1999), Jamaica (2002), Iran (2002), Montenegro (2002), Bosnia and Herzegovina (2002), Serbia (2002), Nigeria (2002), Guatemala (2002), Namibia (2003), Albania (2003), Uzbekistan (2003), Syria (2003), Equatorial Guinea (2003), Colombia (2005), Macedonia (2005), Morocco (2005), Kuwait (2005), China (2005), the Republic of Moldova (2006), Mexico (2006), Vietnam (2006), Saudi Arabia (2006), Libya (2007), Bahrain (2008), Senegal (2008), the Islamic Republic of Mauritania (2008), Bolivia (2012), South Africa (2013), India (2016), and Indonesia (2016).
Spain and the United States have a Friendship, Navigation and Commerce (FCN) Treaty, and a Bilateral Taxation Treaty (1990), which was amended on January 14, 2013, approved by the United States Senate Foreign Relations Committee on July 16, 2014, and authorized by the Spanish Parliament on December 10, 2014. However, the amended bilateral taxation protocol is pending ratification by the United States Senate before it enters into force.
Corporate Income Tax Rate. Generally, 25%
Individual Tax Rate. 22.5%
Corporate Capital Gains Tax Rate. 0% / 25%
Individual Capital Gains Tax Rate. 19%-23%
Residence. Generally, based upon physical presence of more than 183 days in Spain or presence of main center or base of business or economic interests.
Dividends. 0%/19% (resident company) / 19% (individual resident) / 19% (nonresident company) / 19% (nonresident individual)
Royalties. 0% / 19% / 24%
Transfer Pricing. Generally follow the OECD’s transfer pricing guidelines.
CFC Rules. CFC incomes generally includable if no material and personnel resources at the CFC level. Certain “passive” income is subject to CFC rules regardless of material and personnel resources.
Hybrid Treatment. Legislation with respect to anti-hybrid provisions, including general anti-avoidance rules.
Inheritance/estate tax. 7.65% – 34%.
Resident corporations are subject to tax in Spain on their worldwide income. To prevent double taxation, there are exemptions, deductions, and tax credits applicable to income derived from foreign sources. Spain has two methods for granting double tax relief: 1) a tax credit or deduction against Spanish tax for the actual corporate income tax paid abroad, and 2) an exemption from income for qualifying participations. Spain generally does not tax the income of foreign subsidiaries until it is distributed, subject to CFC rules.
Dividends and capital gains from foreign subsidiaries qualify for an exemption from the Spanish corporate tax if the resident corporation owns a participation of at least five percent of the foreign company and has held the participation for at least one year prior to the date on which the dividend is payable. In addition, certain anti-avoidance criteria must be met for the exemption to apply.
In order to qualify for the exemption, the income from the foreign subsidiary must have been subject to tax in the foreign country that is deemed equivalent to the Spanish corporate tax. The subsidiary must have been subject to and not exempt from such tax for the entire year in which the dividend is received. The tax in the foreign country is deemed to be equivalent to the Spanish corporate tax if the foreign subsidiary has a permanent establishment located in a country with which Spain has a tax treaty with an exchange of information clause. At least 85 percent of the foreign subsidiary’s income out of which the dividend was paid must be derived from business activities carried on outside Spain. The exemption does not apply if the foreign subsidiary is located in a country that is considered a tax haven under Spanish regulations. The exemption is not available if the main purpose of the subsidiary is to benefit from the tax exemption, or if losses of the subsidiary are deductible by way of depreciation of the relevant participation.
Spain has thin capitalization rules that apply to related party debt unless the related party is a resident of another European Union country that is not considered a tax haven under Spanish law. If the net interest-bearing debt of an entity that is not a financial institution, made directly or indirectly, to one or more related individuals or entities that are not resident in Spain exceeds three times its capital, the interest attributable to the excess is considered a dividend and not as a deductible expense. The deemed dividend is subject to any applicable dividend withholding tax. With the permission of the Spanish tax administration, the taxpayer may be able to apply a different ratio, based on the financing that the entity would have been able to obtain under normal market conditions from unrelated parties, if the lender is not located in a listed tax haven.
Controlled foreign company rules
Spain has controlled foreign company rules referred to as the “international tax transparency regime.” Under this regime, a Spanish resident company is liable for corporate income tax on some passive income, such as interest, dividends, capital gains, and real estate losses, of non-European Union resident companies or of companies based in tax haven countries. These rules apply where the Spanish resident company owns at least 50 percent of the capital, equity, or voting rights, and where the controlled foreign company has “tainted income.”
Tainted income includes: (1) income from real estate or related rights, unless the real property is effectively connected to a business activity; (2) income derived from participating in the equity of any kind of entity or as a consequence of granting third parties the right to use the company’s financial resources; (3) income from banking, financial, insurance and service activities supplied directly or indirectly to resident individual or corporate related parties, if the related party is entitled to deduct the amount paid for Spanish income tax purposes; and (4) capital gains from the transfer of these types of assets accrued by the controlled foreign company. If thecontrolled foreign company pays local corporate tax on the tainted income that is at least 75 percent of the tax the company would have paid under the Spanish tax regime, it is not subject to these rules.
Income derived from business activities, capital gains, and the transfer of rights of business assets is excluded from taxable income if it is derived from entities in which the resident taxpayer has a direct or indirect interest of more than five percent and the following prerequisites are met: (1) the nonresident company has the supervision and management of the participation through the appropriate organization of means and personnel; and (2) at least 85 percent of the income of the entities from which the income is obtained is created by carrying out business activities. If the amount of passive income derived from the Spanish resident parent company is 15 percent or more of the net profits or four percent of the total turnover of the controlled foreign company, the Spanish resident company includes the proportionate share of income in its tax base.
Gain or loss on the sale of foreign subsidiary stock
Capital gains from the sale of foreign subsidiary stock also qualify for an exemption from the Spanish corporate tax if the participation requirements, one-year holding period, and antiavoidance criteria discussed above are met. The subsidiary must have been subject to an equivalent tax throughout the entire holding period for capital gains to be excluded.
Income derived from a foreign branch is exempt from Spanish corporate income tax if the foreign branch is considered a permanent establishment. To be exempt, the income of the foreign permanent establishment must be derived from the carrying out of business activities. This condition is met if at least 85 percent of the income corresponds to income obtained abroad,and is not subject to the deduction under the Spanish income tax regime. Wholesale commerce, services, credit and financing, and insurance and reinsurance are activities which could be considered as deriving foreign income. Additionally, the income derived by the permanent establishment must be subject to tax with an equivalent tax to the Spanish income tax, and must not be located in a tax haven country.
The exemption for foreign branch income does not apply where losses from the branch were allowed in prior tax periods. The exemption applies to the income from the branch only after the losses are fully recaptured. Additionally, the exemption for foreign branch income does not apply where the permanent establishment was established abroad for the sole purpose of benefiting from this preferred tax treatment.
Intangible property income
Spain adopted a patent box regime in 2007 that reduces the rate of corporate income tax on income derived from intellectual property. A portion of the income derived from the transfer of the right to use qualifying intellectual property is exempt from corporate tax in Spain.
Intellectual property rights included in the incentive regime include patents, drawings or models, plans, secret formulas or procedures, and rights on information related to industrial, commercial, or scientific experiments. The patent box regime does not distinguish between intellectual property income from foreign and domestic sources. In order to qualify for the reduced tax: (1) the intellectual property must have been created by the company transferring the right; (2) the recipient of the right must actually use the intellectual property for business activities; (3) if the recipient is a related company, the intellectual property cannot be used to generate a deductible expense for the transferring company; (4) the recipient company must not be located in a listed tax haven jurisdiction; (5) in the case where one intellectual property contract includes other services, the consideration related to the intellectual property must be clearly differentiated within the contract; and (6) the transferring taxpaying company must keep records of income and expenses pertinent to the intellectual property rights subject to the transfer.
Tax Treaty Network – International Tax Attorneys
Our international tax expertise allows us to guide clients through tax planning and compliance so that they can focus on what matters most. At Freeman Law, our clients are engaged in an interconnected business environment that spans across the globe. From supply chains to markets, cross-country taxation impacts every global business.
Do you have questions about Spain’s Tax Treaties? Schedule a consultation with one of Freeman Laws International Tax Experts Today!