Spanish Tax Treaties Changes – a taxing trend for foreigners


Spain is very active in signing new tax treaties and updating some old treaties, unfortunately not necessarily for the benefit of the individuals investing in Spain.

Double Tax Treaties are bi lateral, supranational laws that regulate the way that foreigners are taxed on assets and income of the other country. Generally speaking where both countries seek to impose tax the tax treaty will override, so that a person does not pay tax twice on the same income/asset.  Where the treaty explicitly allows both countries to impose tax, the country of tax residence should provide a tax credit for the tax paid in the other country. 

On 4 October 2013 the new UK Double Tax Treaty (DTT) was published in its final draft and is awaiting final approval. It is likely to become law before the end of 2013. On 11 June 2013, the new Swiss DTT completed its passage into Spanish/Swiss law and the changes were similar to those proposed for the UK DTT.

A few changes to the UK DTT that are worth mentioning:

Taxation at source on interest received, normally at 21% in Spain, is eliminated.  Presumably this is intended to encourage British investors to purchase Spanish national debt which, in one of the most recent sales of Spanish Bonds, resulted in 20%-30%  being taken up by UK tax residents.

For dividends the withholding tax rate is 10%-15%, depending on the level of shareholding, this overrides the current rate applicable in Spain of 21%. The UK does not apply withholding tax and instead, grants a 10% tax credit via the dividend payment.

However, the most significant changes relate to the ownership of Spanish real estate by companies that have UK resident shareholders.  

Firstly, with regard to capital gains, Spain had no right to charge tax where a UK resident disposed of the shares of any company, regardless of whether it owned real estate in Spain or not. Now Spain will have the right to apply capital gains tax at, currently, 21% on the profit arising from the transfer of shares of a UK company or, indeed, a company of any nationality that owns directly or indirectly, real estate in Spain.  For most people this will not be a problem, because UK capital gains tax will apply in any case to the individual shareholder, therefore any tax in Spain will be credited. However, for certain types of owner, e.g. Trustees, this new clause presents a real problem.

Secondly, with regard to wealth tax, Spain had no right to charge tax where a UK resident held shares of a non Spanish company that directly or indirectly owned real estate in Spain.  Now Spain will have the right to charge wealth tax.  However, amusingly, internal law in Spain does not extend wealth tax in these circumstances so the new tax treaty provision has no effect.

Spence Clarke specialises in the provision of Spanish tax, accounts, law and labour services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.