On January 14, 2013 the United States and Spain signed a new protocol (the “Protocol”) amending the existing income tax treaty between the United States and Spain that was signed on February 22, 1990 (the “Treaty”). The Protocol modernizes the Treaty to conform with the existing treaty policies of both the United States and Spain.

Key provisions of the Protocol include:

  • Exclusive residence-state taxation (i.e., no source-state withholding tax) on payments of interest, royalties, certain capital gains and certain parent-subsidiary dividends.
  • A new dividend provision that provides for (i) 0 percent withholding on dividends paid by certain 80 percent owned subsidiaries; (ii) 5 percent withholding on dividends paid to a 10 percent shareholder and (iii) 15 percent withholding on dividends that do not qualify for a lower rate under (i) or (ii) above. These rates would similarly apply with respect to the U.S. branch profits tax.
  • A more comprehensive and restrictive limitation on benefits (“LOB”) provision intended to ensure that only residents of the United States and Spain will enjoy the benefits of the Treaty. In general, the LOB provides that a treaty resident company will only qualify for the benefits under the Treaty if it satisfies one of the following requirements: (i) a publicly traded company test; (ii) an ownership/base erosion test; (iii) an active trade or business test; (iv) a derivative benefits test; or (v) a headquarters company test. Although the LOB provision in the Protocol is similar to the LOB provisions under most other recent U.S. treaties and the 2006 U.S. Model Treaty, there are certain provisions that are unique to the LOB provision in the Protocol.
  • A new provision relating to fiscally transparent entities (i.e., a disregarded or pass-through entity). Under the new provision, income derived by a fiscally transparent entity that is not resident in the U.S. or Spain will not be eligible for the benefits of the Treaty unless the jurisdiction in which the fiscally transparent entity is resident has an exchange of information agreement with the source state.
  • The Protocol provides for new mandatory binding arbitration procedures between the countries.

The Protocol will enter into force on the date that the United States and Spain satisfy their respective internal ratification procedures. In the Unites States, the ratification process involves a hearing before the Senate Foreign Relations Committee, consideration by the full Senate and then ratification by the administration.