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Does Spain have a double taxation agreement with US?
The tax treaty between Spain and the United States was first signed on February 22, 1990, and later updated in 2013 to reflect modern international tax standards. This double taxation agreement aims to prevent situations where individuals and businesses are taxed on the same income in both jurisdictions, ensuring fair treatment for taxpayers and fostering economic collaboration between the two countries.
Through the double taxation agreement, Spain and the US establish clear rules for allocating taxing rights over income such as real state income, salaries, dividends, royalties, and pensions. The agreement reduces the risk of double taxation by specifying which country has the right to tax specific types of income, while also providing tax relief mechanisms like credits or exemptions. In addition to simplifying cross-border tax compliance, the treaty includes provisions to combat tax evasion, ensuring transparency and cooperation between the two nations’ tax authorities.
What is the tax treaty between Spain and the USA?
It is a bilateral agreement aimed at preventing double taxation and combating tax evasion. It defines the tax rights of each country over various types of income, such as employment income, dividends, interest, royalties, pensions, and capital gains, for individuals and businesses with cross-border connections. By clarifying these rights, the treaty eliminates the possibility of double taxation and provides mechanisms for resolving disputes that may arise.
The treaty outlines specific tax rates and exemptions, depending on the type of income and the residency status of the taxpayer. Additionally, the treaty encourages the sharing of information between the tax authorities of Spain and the US to ensure transparency and enforce compliance.
Objectives of the treaty
The primary objectives of the tax treaty between Spain and the USA include:
- Preventing double taxation: By clearly allocating taxing rights, the treaty ensures that income is not taxed twice in both countries, reducing the financial burden on taxpayers.
- Encouraging cross-border trade and investment: By providing tax certainty and reducing the overall tax liability, the treaty creates a favorable environment for individuals and businesses to invest or operate in both Spain and the US.
- Avoiding tax evasion and fraud: The treaty includes provisions for the exchange of information between the tax authorities of both countries, promoting transparency and ensuring that taxpayers comply with their obligations.
- Providing clarity and legal certainty: The treaty defines rules and procedures for handling tax matters, including resolving disputes, which reduces ambiguity for taxpayers and simplifies compliance.
By achieving these objectives, the treaty supports economic cooperation between Spain and the US while ensuring fair taxation practices.
Who benefits from the tax treaty?
The tax treaty benefits a wide range of individuals and entities, including:
- Individuals with cross-border income: Residents of Spain or the US who earn income, such as salaries, pensions, or investment returns, in the other country benefit from reduced or eliminated double taxation on their earnings.
- Businesses operating internationally: Companies that operate or invest in both Spain and the US can benefit from lower withholding tax rates, clear rules on the taxation of profits, and the ability to offset foreign tax credits.
- Expatriates and dual residents: The treaty provides guidance for determining tax residency and resolving conflicts for individuals who have connections to both Spain and the US.
- Governments and tax authorities: By facilitating the exchange of information, the treaty helps governments combat tax evasion and ensure compliance with tax laws.
The Spain-USA tax treaty is particularly valuable for expatriates, multinational corporations, and investors seeking to navigate the complexities of international taxation while taking advantage of the opportunities available in both countries.
What taxes are covered by the agreement?
The Double Taxation Agreement (DTA) between Spain and the United States specifies the taxes that are subject to its provisions, ensuring clarity for individuals and businesses with cross-border tax obligations. In Spain, the DTA covers the following taxes:
- Income Tax: Applicable to individuals earning income within Spain, whether from employment, self-employment, or other sources.
- Corporation Tax: Applied to the profits of companies operating in Spain, including those with international business interests.
- Non-Resident Income Tax: Targeting income earned in Spain by individuals or entities that are not Spanish residents.
- Wealth Tax: Levied on the net value of assets owned by individuals in Spain, where applicable.
On the United States side, the DTA applies to Federal Income Taxes. This includes taxes on individual income, corporate income, and other related taxes at the federal level, but typically excludes state or local taxes.
The first step in understanding how these taxes interact is determining your tax residency status, which dictates where you are required to declare your income and where you are liable to pay tax.
Tax residency under the Spain USA tax treaty
Tax residency plays a critical role in determining where individuals and businesses must pay taxes under the Spain-USA tax treaty. Establishing tax residency helps clarify which country has the primary taxing rights over an individual’s or entity’s income and ensures the correct application of treaty benefits. The treaty provides clear guidelines for determining tax residency in both Spain and the United States, as well as resolving conflicts when dual residency arises.
Determining tax residency in Spain
In Spain, tax residency is established based on specific criteria outlined in Spanish tax law. An individual is considered a tax resident in Spain if they meet any of the following conditions:
- Physical presence: Spending more than 183 days in Spain during a calendar year automatically makes you a tax resident, regardless of whether those days are consecutive.
- Economic ties: If your primary economic interests, such as business activities or income sources, are centered in Spain, you may be classified as a tax resident.
- Family ties: Maintaining close family connections in Spain, such as having a spouse or dependent children living there, can also establish tax residency.
Tax residents in Spain are required to declare and pay taxes on their worldwide income, making it essential to determine your residency status accurately.
Determining tax residency in the USA
In the United States, tax residency is primarily determined using the substantial presence test or by holding a green card. You are considered a tax resident in the US if you meet either of these criteria:
- Substantial presence test: You are a tax resident if you are physically present in the US for at least:
- 31 days during the current year, and
- 183 days over the past three years, calculated as:
- All the days present in the current year,
- 1/3 of the days present in the previous year,
- 1/6 of the days present two years ago.
- Green card test: Holding a green card (permanent resident status) automatically makes you a tax resident in the US, regardless of physical presence.
US tax residents are required to report their worldwide income to the Internal Revenue Service (IRS), but the tax treaty helps ensure they are not taxed twice on the same income.
Resolving dual residency conflicts
The Spain-USA tax treaty provides a framework for resolving dual residency conflicts when an individual qualifies as a tax resident in both countries. These conflicts are addressed using tie-breaker rules outlined in the treaty, which assess factors such as:
- Permanent home: Priority is given to the country where the individual has a permanent home.
- Center of vital interests: If a permanent home exists in both countries, the focus shifts to where the individual’s economic and personal ties are stronger.
- Habitual abode: If the first two factors are inconclusive, the decision depends on where the individual spends more time habitually.
- Nationality: If all else fails, nationality may determine residency.
- Mutual agreement procedure: In cases where the tie-breaker rules are insufficient, tax authorities from both countries will collaborate to resolve the conflict.
By applying these rules, the treaty ensures clarity and fairness, enabling individuals to meet their tax obligations in the correct jurisdiction while avoiding double taxation.
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.
Key provisions of the tax treaty
The tax treaty Spain USA outlines specific provisions to determine how different types of income and capital gains are taxed, ensuring fair allocation of taxing rights and preventing double taxation. Here’s a breakdown of the key provisions.
Real Estate Income
Under the treaty, real estate income is taxed in the country where the property is located (State of Source). This includes both rental income and capital gains derived from the sale of property. For instance, if you are a tax resident in Spain but rent out a property in the US, you are required to pay taxes on that income to the IRS in the United States.
However, as a resident of Spain, you must also declare your worldwide income, including US rental income, in your Spanish tax return if it exceeds the applicable thresholds. To avoid double taxation, the treaty allows you to claim tax relief in Spain for the taxes already paid in the US. This ensures that you are not taxed twice on the same income.
Pensions
The tax treatment of pensions under the Spain-USA tax treaty depends on the type of pension:
- Public pensions (civil servant pensions): These are taxed exclusively in the country where the civil service was performed (State of Source). For example, if you served as a civil servant in the US, your pension will be taxed there and not in Spain. However, it may still be considered in Spain to calculate the applicable tax rate on your other income.
- Private pensions: These include state pensions and private retirement plans. They are taxed in the country where you reside (State of Residence), regardless of where the pension income originates or where the company paying the pension is located. For residents of Spain receiving US private pensions, the income must be declared in Spain, and no tax is due in the US.
Interest
Interest income is subject to taxation in both the State of Source and the State of Residence, but the treaty imposes a limit on the tax rate applied by the State of Source. For example, if you are a resident of Spain and receive interest income from the US, the US may tax this income at a maximum rate of 10%.
To prevent double taxation, the tax treaty allows you to claim relief in Spain for the tax paid in the US. This means you can offset the amount paid to the IRS against your Spanish tax liability on the same interest income.
Dividends
Dividends are primarily taxed in your State of Residence. However, the treaty also permits the State of Source, where the company distributing the dividends is located, to tax this income, typically within a limit of 5-15%. For example, if you are a Spanish resident receiving dividends from a US company, the US may apply a withholding tax of up to 15%.
In Spain, you must declare the dividends as part of your worldwide income but can deduct the tax already paid in the US from your Spanish tax liability. This mechanism ensures that you are not taxed twice on the same dividend income.
Other Capital Gains
The taxation of capital gains depends on the type of asset:
- Real estate property: Capital gains from the sale of real estate are taxed in the State of Source, as explained under the provisions for real estate income. If you sell a property in the US while residing in Spain, the capital gain is taxed by the US, and relief can be claimed in Spain for taxes paid.
- Other assets: Capital gains derived from the sale of non-real estate assets, such as stocks or personal property, are taxed in your State of Residence. For instance, a Spanish resident selling shares of a US company will report and pay taxes on the capital gain in Spain, with no additional tax due in the US.
These provisions aim to balance taxing rights between Spain and the US while providing taxpayers with mechanisms to avoid double taxation and ensure fair treatment.
Penalties for non-compliance
Failing to comply with the tax treaty Spain USA obligations can result in significant penalties in both jurisdictions. These penalties aim to ensure taxpayers accurately report their income, claim treaty benefits appropriately, and meet their tax responsibilities.
Non-compliance can take various forms, including failing to declare foreign income, not paying taxes owed, or misusing treaty provisions to evade tax liabilities.
In Spain, non-compliance can lead to fines, surcharges, and interest on unpaid taxes. The penalties depend on the severity of the violation, ranging from minor administrative infractions to serious tax fraud charges. Similarly, in the US, the Internal Revenue Service (IRS) imposes strict penalties for underreporting income or failing to file required forms, such as the Foreign Bank Account Report (FBAR) or other disclosures for foreign income. Severe cases may result in criminal prosecution or asset seizure.
To avoid these consequences, it’s crucial to fully understand and adhere to your obligations under the tax treaty. Consulting a tax professional with expertise in international taxation can help you stay compliant and avoid costly mistakes.
Tax credits and exemptions
One of the key features of the Spain-USA tax treaty is the provision for tax credits and exemptions, which are designed to eliminate or mitigate the impact of double taxation. These mechanisms allow taxpayers to offset taxes paid in one country against their tax liability in the other, ensuring they are not taxed twice on the same income.
- Tax credits: If you are a tax resident in Spain and earn income in the US (such as rental income, dividends, or interest), you are required to declare that income in Spain. However, the treaty allows you to claim a credit in Spain for the taxes you have already paid to the IRS. Similarly, US residents earning income in Spain can claim a foreign tax credit on their US tax return for taxes paid in Spain.
- Exemptions: Certain types of income may be partially or fully exempt from taxation in one country. For example, public pensions are typically only taxed in the country where the civil service was performed (State of Source) and are exempt in the State of Residence. Additionally, reduced withholding tax rates on dividends, interest, and royalties under the treaty may effectively exempt a portion of the income from taxation in the State of Source.
By understanding how to properly apply tax credits and exemptions, taxpayers can significantly reduce their tax burden and fully benefit from the treaty’s provisions.
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 for fiscal residents.
How Pellicer & Heredia can help you?
At Pellicer & Heredia, we specialize in providing personalized service on double taxation agreement between Spain and the USA. Whether you need help with tax residency, applying treaty benefits, or avoiding double taxation, our team of experts ensures compliance with Spanish and US tax laws while maximizing your benefits.
For more information or assistance, do not hesitate to contact Pellicer & Heredia on + 34 965 480 737 or email us at info@pellicerheredia.com.
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