On July 16, 2019, the US Senate ratified a new protocol that amends the 2013 Double Taxation Treaty signed between the US and Spain. The approval and ratification of the protocol had already been completed in Spain. However, there are still outstanding procedural requirements in the US before the protocol enters into force.
Under the protocol, there is a complete withholding tax exemption on dividends if the beneficial owner has an ownership interest of more than 80% of the voting stock during the previous 12 months. In addition, dividend withholding tax is reduced to 5% if the beneficial owner of the dividends has a an ownership interest in excess of 10% (previously 25% withholding tax). The branch profit tax rate has been aligned with these new withholding tax rates.
Importantly, interest and royalties will no longer be subject to withholding taxes (previously, 10% withholding tax), provided that the recipient is the beneficial owner. This creates a level playing field between the US and the EU Member States insofar as interest and royalty payments made within the EU are generally tax exempt under the EU Interest-Royalties Directive.
Under the protocol, capital gains arising from the sale/transfer of shares will not be subject to taxation, except in case of transfer of shares in companies holding real estate property or timeshare rights.
Lastly, the protocol includes a limitation of benefits provision designed to restrict the benefits of the Treaty to tax residents of the US and Spain. A mandatory and binding arbitration provision has been added by the Protocol, along with some procedural rules. Finally, the exchange of information provisions have been updated to align with US Model and OECD standards.
The protocol is likely to have a significant effect on investments between the two countries because of the lower taxation and increased certainty.
For many, investments/structures between the US and Latin America (that are currently held through Spain), the protocol needs to be examined carefully to ensure that the limitation of benefits provisions are satisfied in order to continue to receive the benefits of the treaty. Where these requirements are met, the protocol will provide significant tax savings in the form of lower withholding tax rates, lower branch profit taxes, and capital gain exemptions.
The compulsory and binding arbitration provisions under the Protocol are also an important development, as they provide certainty for US companies with respect to cross-border dispute discussions with Spanish tax authorities. The ability to leverage treaty provisions, and to invoke MAP and subsequent arbitration, will become an important consideration in managing cross-border disputes.