On 27 November 2019, the U.S.-Spanish Tax Treaty, which dates back to 1990, will be significantly amended by the entry into force of a new Protocol. In most cases, the Protocol eliminates taxation at source, creating significant savings and consequently facilitating the direct investment between the two contracting States.
- On dividends, a 0% withholding tax rate will apply to corporate shareholders controlling 80% of the voting stock of the subsidiary and certain conditions are met (a 5% rate applies for holdings of at least 10%).
- Interest and royalty payments will no longer be subject to withholding taxes (limited exceptions apply in connection with certain U.S.-source interest).
- Capital gains will only be taxed at source on the disposal of real estate and real-estate holding companies (subject to certain conditions).
The Protocol also reinforces the technical mechanisms to avoid double taxation through Mutual Agreement Procedures (“MAPs”) and provides for arbitration to resolve disputes. The Treaty’s exchange-of-information article is updated to current standards.
Also of interest is the new wording of the Limitation of Benefits (the “LoB”) article, which is highly detailed and includes favorable exceptions such as the “headquarters company”, along with the regulation of fiscally transparent entities and funds. The application of the LoB article must be carefully analyzed by U.S. investors holding Spanish investments.
Finally, the Protocol and MoU slightly amend the 2006 Competent Authority Agreement entered into between the U.S. and Spain on the tax treatment of LLCs, partnerships, and disregarded entities. Income obtained through fiscally transparent entities will benefit from the provisions of the Treaty and the Protocol, provided that (i) the income is allocated to a resident (as defined in the Treaty) for the purposes of its taxation in accordance with domestic provisions; (ii) the LoB exclusions do not apply; and (iii) the fiscally transparent entity is organized under the laws of the U.S. or Spain, or those of a State that has entered into an agreement for the exchange of tax information with the specific country.
It should be noted that the 2006 Competent Authority Agreement did not include the restriction included in point (iii) above; as such, careful analysis should be undertaken with respect to existing structures that include the use of fiscally transparent entities holding Spanish investments when such entities are organized in jurisdictions such as, for example, the Cayman Islands or Bermuda, tax-haven territories for Spanish tax purposes.