Double taxation treaty (CDI) between Spain and the United States

Double Taxation Treaty (CDI) Between Spain And The United States

On the 27th November 2019, the new double taxation treaty (CDI) between Spain and the United States – agreed in July this year – came into force. 

The new agreement benefits many professionals working between the two states: with fewer taxes for investors, generating a better climate for cross-border investment.

Most importantly, the new treaty reduces taxes at source on dividends, profits and interests, and allows for tax-free transfer on pension plans.

Here are some of the fundamental changes to note:

  1. Dividends
  2. Permanent establishment
  3. Interest
  4. Capital gains
  5. Branch tax
  6. Royalties
  7. Pensions, annuities and alimony

1. Dividends: abolition of taxation at source

If the beneficial owner of the dividends is a company owner in the other ‘contracting state,’ i.e. the country of residence.

The taxation in their country of origin is annulled; provided that they own at least 80% of the voting capital of the company.

Taxation in the country of origin is also annulled if the effective beneficiary is a pension Fund. 

In all other cases:

5% of the gross dividend amount is applied if the beneficial owner is a company that directly owns at least 10% of the voting shares of the company that pays the dividend.

A maximum of 15% of the gross dividend amount is applied in all other cases.

Before the new double tax treaty came into force, the withholding tax at source was 10% if the beneficiary is a company with at least 25% of the voting shares, and 15% in all other cases.

2. Permanent establishment: minimum term

The new treaty has extended the minimum length of time for a building, construction site or installation project to be considered as a permanent establishment from 6 to 12 months. 

3. Interests

As a general rule, withholding tax on interest is eliminated. This refers to taxation on the interest generated in one of the countries when the beneficiary is the other one Before the new treaty, interest payments made to a US company were subject to a 10% withholding tax.

In the following cases, interests will be taxed in their country of origin:

  1. – If they are contingent interests of American origin and their beneficial owner is a resident in Spain. The tax rate may not exceed 10% of the gross amount.
  2. – If they are interests that constitute a surplus corresponding to a residual interest in an investment channel in securities backed by mortgages on real estate, they can be taxed in the US without any limit.

4. Capital Gains

The new treaty has eliminated taxation on capital gains from the source country. They can now only be taxed in the state of residence.

The one exception to the rule is on income derived from the transfer of shares of capital when the principal asset is real estate (directly or indirectly).

In this case, the capital gains can still be taxed within the source state as non-resident income tax.

5. Taxation on branch profits

Taxation on branch profits has been eliminated in the new treaty. Originally a 10% taxation was applied to head offices for their branch profits.

Although this taxation has been eliminated, it still retains the arrangement for authorising branch profit tax; however, it now applies the rate imposed on dividends.

6. Royalties

Taxation on royalties at source has been eliminated under the new treaty. They may now only be taxed in the beneficiary’s country of residence.

7. Pensions, annuities and alimony

When a resident in one state is a member, beneficiary or participant of a pension fund derived from the other state, the income from the pension is now subject to a zero rate tax in its country of origin.

However, tax is still applicable in the state of the beneficiary’s residence. This allows for a tax-free transfer of pension funds. 

The protocol of these modifications to the CDI also extends the scope of the exchange of information and administrative assistance between both States.

Establishing that the Contracting States can request information even if they do not need it for their own tax purposes.

Likewise, the Limitation of Benefits clause has been adapted, and as a general rule, uses the criteria that the United States has established in CDIs agreed with other third states.

If you have any questions on the Double Taxation Treaty, contact us today for a free no-obligation chat.

2 thoughts on “Double taxation treaty (CDI) between Spain and the United States”

  1. Hi Maria,

    I’m a Norwegian citzen and a permanent resident in the USA, Florida. I have worked in the US for 25 years, is now retired and receiving 2 pensions, Social Security and post 401k

    My plan is to move to Spain, in 2024 to buy an apartment and live there permanent.

    I see there is a double tax treaty between the US and Spain, but will I continue to be taxed in the US, or will this change, as I will have to transfer from my US pension funds to Spain ?
    Would it benefit me to apply for a permanent resident status in Spain, or should I limit my stay there, and remain a none-resident (proms & cons) ?

    Appreciate your reply, thanks

    Kind regards

    Stale Eide

    1. Maria Luisa Castro

      Dear Stale Eide,

      The considerations you’re facing are common among individuals planning to retire abroad, and it’s wise to think ahead about the tax implications and residency status. I’ll outline some general information for you but please know this is not personalised advice.

      Taxation Under the US-Spain Tax Treaty:

      The United States and Spain have a Double Taxation Treaty in place, which serves to prevent double taxation of the same income in both countries. As a U.S. citizen and tax resident, you are taxed on your worldwide income. However, the treaty may provide specific rules about which country has the right to tax certain types of income.

      Regarding your pensions:

      Social Security Benefits: Under the current treaty, U.S. Social Security benefits are only taxed in the United States, even if you are a resident of Spain. You would still need to file a U.S. tax return and report these benefits.

      401(k) or similar pensions: The treaty typically allows the country of residence (Spain, in this case) to tax private pensions. However, there are provisions and exceptions, so the specific details of the treaty at the time of your move will govern how these are taxed.

      Residency and Tax Implications:

      If you become a tax resident in Spain (usually by spending more than 183 days there in a calendar year), you will be required to report and potentially pay taxes on your worldwide income in Spain, although the tax treaty should mitigate double taxation.

      Becoming a permanent resident could potentially simplify your status in Spain and might make financial sense if you plan to live here indefinitely. The benefits could include access to healthcare, other social services, and the ability to travel more freely within the Schengen Area.

      However, as a permanent resident of Spain, you may be subject to Spain’s wealth tax, inheritance tax, and other local taxes, which might not be the case if you limit your stay and remain a non-resident. Each status has its advantages and drawbacks:

      Pros of Permanent Residency:

      Stability and certainty of your status in Spain.
      Potential access to social services.
      Easier to establish and maintain a domicile for personal and financial purposes.
      Cons of Permanent Residency:

      Subject to worldwide income tax in Spain.
      Possible wealth tax implications.
      Complexity in tax filings in both the U.S. and Spain.
      Pros of Remaining a Non-Resident:

      Limited tax liability in Spain (only Spanish-sourced income).
      Avoidance of Spanish wealth tax.
      Cons of Remaining a Non-Resident:
      Less stability in terms of long-term residency.
      May not have full access to social services.
      Limits on the time you can spend in Spain before becoming a tax resident.
      Additional Considerations:
      You will continue to have U.S. tax filing obligations due to your citizenship.
      You may need to report foreign bank and financial accounts to the U.S. Treasury (FBAR) if the total exceeds $10,000 at any point during the year.
      The Foreign Account Tax Compliance Act (FATCA) also has its own reporting requirements.
      Since tax laws and treaties can change, and individual circumstances can significantly affect tax obligations, I strongly recommend that you seek professional tax advice tailored to your situation. An international tax advisor can help you understand the treaty in detail and plan your move to minimize your tax burden. Additionally, consulting with an immigration lawyer will help you navigate the residency process in Spain.

      I hope this overview helps, and I wish you a smooth transition to your retirement in Spain.

      Kind regards,

      Maria L

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