Double taxation agreements with Spain

Spain is a country that stands out for its vibrant culture, scenic landscapes, and robust tax framework designed to bolster both local and international economic participation. DTAs are bilateral agreements between two nations, aiming to protect against the risk of double taxation where the same income is taxable in both countries.

At its core, a Double Taxation Agreement (DTA) is an agreement between Spain and another country designed to prevent double taxation for taxpayers who generate income in both jurisdictions. Typically, without such treaties, an individual or corporation earning income in one country and residing in another would be subject to tax on the same income in both countries. DTAs ensure that income earned outside one's resident state is taxed once, potentially providing significant relief in cross-border economic activities.

Spain has a strong global presence that makes it a strategic centre for international business. As part of its efforts to foster investment, Spain has entered into more than 90 double-tax agreements with various countries, including those in Europe, the Americas, Africa, and Asia.

Various types of income, such as dividends, royalties, interest, and capital gains are covered by DTAs. Understanding how these agreements work is crucial for anyone looking to benefit from them. Here’s a simplified guide on what DTTs are, their application, the types of income they cover, and the countries Spain has agreements with.

Countries that currently have a DTA with Spain

Spain’s network of Double Tax Agreements (DTAs) is extensive, with agreements with nations across the globe covering regions such as Europe, North and South America, Africa, Australia and many others. This wide-ranging list highlights Spain’s commitment to fostering an environment for international investment and workforce mobility.

How Double Taxation Agreements are applied

The application of DTAs primarily hinges on determining an individual's or an entity's tax residency. Tax residency determines which country has the primary right to tax an individual's worldwide income. In Spain, individuals are considered tax residents if they spend more than 183 days within the Spanish territory in any calendar year or if the centre of their economic interests is in Spain. Corporations, on the other hand, are deemed tax residents if they are incorporated under Spanish law or if their central management and control are situated in Spain.

Once residency is established, taxpayers may need to obtain a Tax Residency Certificate from the Spanish Tax Agency (Agencia Tributaria) or the respective tax authority in their country of residence. This certificate serves as formal proof of residency status and is required to enjoy the benefits of the DTA.

Double Taxation Agreements provide for the elimination of double taxation either through the exemption method or the credit method:

1. Exemption Method: Under this approach, income that is taxed in the source country is exempt from tax in the resident country. However, the exempt income may still affect the tax rate applied to the remaining income in the resident country, a concept known as "exemption with progression".
2. Credit Method: The credit method allows taxpayers to credit the tax paid in the source country against the tax owed on the same income in the resident country. This method ensures that taxpayers are not taxed more heavily on their foreign income than they would be on their domestic income.

It is important to note that deductions or credits cannot exceed the amount that would be charged in Spain.

Types of Income Covered

Double Taxation Treaties typically encompass various types of income and capital gains. These include:

• Dividends
• Royalties
• Pensions
• Annuities
• Interests
• Corporate taxes.

However, it’s worth mentioning that inheritance tax is not commonly covered under these agreements due to the differences in taxation entities (beneficiary vs. estate) across countries.

Spain's DTAs set specific rules for different types of income, such as pensions, real estate income, dividends, interests, and capital gains, offering guidance on which country has the right to tax them. Often, the country of residence is granted the taxing rights, but there are exceptions sometimes, such as public pensions taxed in the country of service (source country). To avoid double taxation, individuals can claim tax relief in their country of residence for taxes paid in the source country.

Let's have a look at the most common ones:

• Real Estate Income: Income from property, including rental income and capital gains from selling property, is taxed in the country where the property is located. Tax relief can be claimed on these taxes in the resident country if required.
• Pensions: Public pensions are taxed in the service country, while private pensions, including state and corporate pensions, are taxed in the resident country.
• Dividends and Interests: Both are typically taxed only in the resident country, though the DTA might allow for a limited tax rate on dividends in the source country, deductible in the resident country.
• Other Capital Gains: Assets other than real estate sold in the resident country are taxed there.

Real Life Double Taxation Scenarios

To get a better understanding of how some DTAs work let's take a look at a couple of common scenarios with an EU Citizen and a UK Citizen:

Example 1: EU Citizen Working in Spain

Maria, an IT consultant from Germany, has accepted a new position in Spain:

For the first six months of her contract, she commutes, maintaining her residence in Germany but working weekdays in Spain. In Maria's case, her income from employment is primarily taxable in Spain as the work is physically done there. However, since she is still considered a resident of Germany as well, Germany could also have the right to tax her earned income.

Under the double taxation agreement between Spain and Germany, Maria's income would be subject to Spanish tax laws for the days she works there. Still, she'd be able to claim relief for this Spanish tax against her German tax due on the same income, avoiding double taxation. This assumes that Maria has stayed in Spain less than 183 days in the fiscal year and is still considered a resident of Germany.

Once Maria decides to move her residence to Spain, she will become a tax resident of Spain after spending more than 183 days in the Spanish territory within the same calendar year. Her worldwide income now becomes subject to Spanish taxation. However, due to the DTA, her German-sourced income (if any) would typically be taxed in Germany, but allowed as a credit against her Spanish tax to prevent double taxation.

Example 2: UK Citizen Receiving a Pension in Spain

John, a retired UK government official, has moved to Spain:

John receives a government service pension from the UK. As he's now a resident in Spain but not a Spanish national, according to the Spain-UK DTA, his pension would be taxed exclusively by the UK, his home country that pays the pension. Even as a tax resident in Spain, he will not be taxed again on this pension in Spain.

However, any other private pension income John might have from other employment could be taxed in Spain because that is where he resides. The UK could allow John a credit for any Spanish tax paid on non-government pension income to ensure he does not pay tax twice on the same income.

This highlights how DTAs work to allocate taxing rights between two countries to ensure that expatriates like Maria and retirees like John do not end up being taxed twice on the same income. They clarify where taxes should be paid and how tax payments in one country can be credited against obligations in another, smoothing out the financial transition involved in becoming an expatriate resident.

The application of Double Taxation Agreements is a nuanced process that requires a thorough understanding of the specific terms and conditions outlined in each agreement. For individuals and enterprises operating between Spain and other nations, leveraging these agreements effectively can significantly impact tax liabilities and overall financial planning. Given the complexity of tax laws and DTA provisions, obtaining expert advice is often advisable to navigate the intricacies of these agreements and optimise tax obligations. Why not take the next step towards planning your future and reach out to a tax consultant within our directory to help you plan your finances for Spain?