Double Taxation US-Spain

New agreement on Double Taxation with the United States: Advantages for Spanish businesses

Last July, an important step was taken towards the modification of the Agreement in order to avoid the double imposition of taxes on Spain by the United States. Almost six years after its negotiation, the American Senate gave the green light to said Agreement. The final step for its coming into effect was the United States concluding its internal process of ratification, which was announced on Tuesday 27^th August. As such, the three-month waiting period for its coming into effect (which is scheduled for this coming 27^th November) can now begin.

The previous agreement was signed in 1990, a time in which the economic and commercial landscape was very different to that of today. The proposed modification represents the modernization of the Agreement, to adapt it to the changes to the model of the OECD as well as to an old request of the companies who find themselves in a worse situation than companies in other EU member states.

In the opinion of the American Chamber of Commerce in Spain, it will favor the country as a destination for American countries to invest in over other countries which, until now, have enjoyed better agreements; and it will improve the position of Spanish subsidiaries in the United States which had been competing with other foreign groups who had a more favorable fiscal mark

Most relevant modifications

In particular, the new text from the Double Taxation Agreement includes modifications in the following areas:

1. The levy is reduced at the source of certain dividends (from 10% to 5% in joint ventures in at least 10%, and 15% in all other cases), with the exemption being established at the source of the dividends in the case of majority shares totaling 80% or more.
2. The concept of permanent establishment is amended and the minimum time required to consider an establishment as permanent is extended (from 6 to 12 months).
3. The two states’ waiver to tax capital gains at source arising from the disposal of shares is incorporated, unless they grant the right to the enjoyment of immovable property.
4. Improvements are made to amicable procedures including the possibility of going to arbitration. It is the third Spanish agreement which has this possibility, already provided for in the Swiss and British agreements.
5. The withholding tax on interest for banks is eliminated. Until now, interest payments made to EU entities were tax-exempt in Spain, while interest payments made to US banks were subject to a 10% withholding tax.
6. A definition of “pension fund” is introduced.
7. The application of the benefits of the Agreement to transparent entities is regulated. The provision clarifies where the Agreement is applicable to income received by a participant of a transparent entity residing in one of the contracting states. This is an important provision given the number of transparent entities, or those that may opt for this taxation, existing in the United States.
8. It deepens the clauses for the exchange of information and administrative assistance, adapting them to the new standards of the OECD model agreement.

It should be borne in mind that the protocol includes a complex benefit limitation clause, which will determine the subjective scope of application of the Agreement, introducing the concept of a “qualified person”. In short, a natural or legal person is “qualified” to benefit from the Agreement who, in addition to being a resident, has a sufficient link with the State of residence, or valid economic reasons to obtain the yield from that State of residence generated in the source State.

Entry into effect

In relation to taxes withheld at source, the entry into effect will be 27^th November 2019. Dividends paid from that date in the case of shares exceeding 80% are therefore generally exempt from withholding.

In relation to taxes that have a tax period, entry into force will take place for fiscal years beginning on or after 27 November 2019.

With regard to amicable procedures, the new protocol applies to cases that are initiated from its entry into effect.

In all other cases, the entry into effect will be on 27^th November 2019.

Other agreements

Spain is not the only country that has had the green light for the amendment of its Agreement with the United States. On 6^th August 2019, President Donald Trump signed instruments for the ratification of bilateral double taxation treaty conventions with Japan, Luxembourg and Switzerland. Thus, everything seems to indicate that the United States seeks to meet its commitment to modernize its network of international tax treaties.

Authors: Jorge Ajuria