What is a double taxation agreement?
Double Taxation Agreements (DTAs) also known as Double Taxation Treaties, are agreements between two states designed, on the one hand, to protect individuals and businesses against the risk of double taxation when the same income can be taxable in two jurisdictions; and on the other hand, protect the government’s taxing rights and stop attempts to avoid or evade tax.
They can often be complex and require professional assistance, however, in this article we are going to focus on explaining some of the key points when it comes to understanding how Double Taxation Agreements work, to ensure their correct use.
Although many DTAs follow similar guidelines, in this case, we are going to focus on the Double Taxation Treaty between Spain and Canada.
What taxes are covered by the agreements?
The DTA covers the following Spanish taxes:
- Income Tax (IRPF)
- Corporation Tax (IS)
- Non Resident Income Tax (IRNR)
- Local income taxes (IBI, IIVTNU)
- Wealth Tax (IP)
Along with taxes payable by the Government of Canada under the Income Tax Law.
So now, the first step is figuring out where you should be declaring your income and, where you are liable to pay tax.
When travelling back and forth to different countries, switching from one home to the other, and spending similar periods of time in several countries, sometimes it can be difficult to determine in which country you should be paying your taxes.
First of all, Double Taxation Agreements confirm that you will be a resident in the country in which you meet the requirements under the national laws of that State.
For example, under Spanish laws, you will be considered to be a resident for tax purposes when you have your usual residence in Spanish territory. This happens when you either:
- Spend more than 183 days a year in Spain (January-December)
- It is where your main economic activities or interests lie
- There is also a presumption you are a resident in Spain when your spouse and minor children are resident there, although the Tax Office does accept evidence against this.
You are considered a resident of a Contracting State (Spain or Canada, in this case) to any person who, under the laws of that State, is subject to taxation in that State by reason of his domicile, residence, place of management or any other similar criterion.
As a result, sometimes we can meet the requirements to be considered as a tax resident under the laws of both countries. In these cases, to make things easier, the Double Taxation Agreements contain a certain list of tiebreaking rules that are applied in strict order.
The first criteria that you meet, will determine exclusive tax residency in that country:
- You will be considered exclusively a tax resident of the State in which you have disposal of a permanent property. If this rule does not apply, or you possess property in both countries, your State of Residence will be considered as the one in which you present greater personal and economic ties.
- If neither or these rules lead to a clear answer, residency can also be determined by analysing in which one you live on a more regular basis.
- However, if you spend long periods of time in both States or don’t spend hardly any in either, then you can be considered a resident in the State of which you are a national.
- Finally, if none of the tiebreaking rules above apply, then it will be the authorities from both States who must come to a mutual and friendly agreement regarding where you’ll be a tax resident.
Once you’ve established where you are a resident for tax purposes, this is now where you should be presenting your annual tax returns. As you may know, there are several types of taxes such as income, wealth or corporation tax that require you to declare your worldwide income no matter what country it comes from.
However, at the same time, sometimes we find ourselves obliged to pay tax in other countries where we are not residents. Why is this?
This is because each Double Taxation Agreement sets special rules for each type of income (Pensions, Real Estate, Interests, Salaries, Capital Gains, Dividends…) and occasionally allows the other countries to also levy income. When this is the case, you can apply for tax relief in your tax return in the country where you are considered a resident, to avoid double taxation.
In order to make this explanation easier, from here on out we are going to differentiate between two terms: “State of Residence” being the one we are considered residents for tax purposes, and “State of Source” which will refer to the country from which we have received the income, supposing they are not the same.
Real Estate Income
According to the DTAs, any type of income received from a property at your disposal will be taxed at the State of Source, thus being where the property lies. This includes rental income and capital gains when selling.
For example, if you are a tax resident in Spain but rent out a property in Canada, you must pay Canadian taxes to the CRA (Canada Revenue Agency).
If you are then obliged to present your annual income tax return in Spain because your income is over the thresholds, then you will be able to claim tax relief for the tax paid abroad and avoid double taxation
Double Taxation Treaties differentiate between two different types of pensions:
- Public pensions, which refer to civil servant pensions, and will always be taxed in the country in which you served, (State of Source). They will not be taxed in your State of Residence; however, they may be taken into account to determine the applicable tax rate.
- Private pensions, include both state pensions and private pensions, and will be taxed in the country where you are resident (State of Residence) regardless of where the company, you worked for or receive the pension income from, is located.
The Spain-Canada DTA provides that if you receive interest from Canada and you are resident in Spain, you will declare your worldwide income in Spain, and your Canadian interest may also be taxed in Canada, not exceeding 10 per cent of the gross amount of the interest.
Dividends will be taxed in your State of Residence. Nevertheless the DTA may allow them to also be taxed in the country where the company who distributes the dividends is resident (State of Source), normally setting a 5-15% rate limit, which you can deduct from your tax return in your State of Residence.
Other Capital Gains
- Capital gains obtained from selling property will be treated as explained above in Real Estate Income.
- Capital gains derived from selling other assets will be taxed in your State of Residence.
Please note that this information is for general use only. For accurate advice and guidance, we highly recommend you book an appointment with an independent lawyer. Additionally, please see the following link about tax benefits if you are a fiscal resident in Spain.
If you want to download the full agreement, click here.
For more information or assistance, do not hesitate to contact Pellicer & Heredia on + 34 965 480 737 or email us at firstname.lastname@example.org.