Spain and the United Kingdom have had a Double Taxation Treaty since 1975 which was amended in 1993. However, there was a more recent need for modernising its provisions due to the current economic and commercial relationships between Spain and the United Kingdom (UK) and a new treaty is coming into force on 12 June 2014. It was signed in March 2013 with a view to avoiding double taxation in relation to taxes on income and on capital, and for the purposes of preventing tax evasion and assisting international tax enforcement.
The treaty will be relevant in particular to individuals and companies who may be a tax resident in one country but their income comes from another. It will also be relevant to individuals who may be considered a tax resident in both countries because both Spain and UK have different rules to ascertain tax residency. If you would like to avoid the tax authorities of both countries to come after you, you should establish where you or your company are liable for taxes.
Finding out which country you or your company are a tax resident may be straightforward in many situations (i.e. domicile, residence, place of management, place of incorporation or similar criteria). However, in relation to individuals, it could turn out to be a complicated issue. If you are one of those individuals who may be expected to pay taxes under the domestic laws of both countries, the new treaty includes some guidelines. In the first instance, it will be necessary to consider where your permanent home is. If you have one in both countries, then you need to consider which country your personal finances are more closely linked to. If this cannot be determined, you need to consider which country you will spend more time in. If by any chance, this is in both or neither of them, then you will be a tax resident in your country of nationality. These provisions are in line with the old treaty. However there have been situations in which individuals had double nationality and therefore an issue arose between the tax authorities in both countries. The new treaty has, in theory, solved this problem by incorporating a new mutual agreement procedure when there is a conflict.
Some of the new treaty provisions can be summarised as follows:
- Interest and royalties will be taxed in the country where the beneficiary who owns them is a tax resident, unless the beneficiary carries on business in the country in which the interest or royalty arises through a permanent establishment and the interest of royalty is connected with that establishment.
- The interests and royalties withholding tax rates (also called retention tax rates) have been reduced from 12% and 10% to 0%. Also, the dividends withholding tax rate has been reduced from 15% to 10% in general. For qualifying companies and when the beneficiary is a pension scheme in the other country they have been reduced from 10% to 0%.
- Another innovation of the treaty is that it has new rules for the application of the treaty when an item of income, profit or gain is obtained by a partnership, trust, and group of persons or other similar entity.
- Trusts are not recognised in general terms from a Spanish point of view. However, the new treaty has now introduced “trust” in the definition of “person”. It states that the term “person” includes an individual, a trust, a company, and any other body of persons. The treaty also states that “trust” means a trust which is a resident of the UK under its domestic law. The residents of Spain who are beneficiaries of a UK trust will now be taxed in Spain on the gross amount of income they receive or are entitled to receive from the trust.
- The new treaty also contains an anti-abuse clause in order to evaluate if there is a legitimate right to use the benefits of the treaty. There will not be relief under the treaty if the main purpose or one of the main purposes of, for example creating a right in respect of which income arises, was to take advantage of the treaty. It is essential for companies to be extremely careful about their strategies to avoid unnecessary discussions with the tax authorities or additional costs as a consequence of improper use of the treaty.
- Regarding capital gains, the old treaty stated that capital gains derived from the transfer of shares would be taxed in the country of residence of the seller. Therefore if you were a UK tax resident you would not be taxed in Spain. The new treaty however shifts the taxation to the country where the property is located when more than 50% of the value of the company is based in real estate. This will be significant for some companies selling their property in Spain.
- There have been some changes in respect of the income from a share or right of enjoyment. The new treaty states that the income from the direct use, letting or use in any form, of such right to enjoyment, may be taxed in the country where the property is situated. However, this income will not be attributable to the owners of rights to the enjoyment of such property on a time-sharing agreement, when such enjoyment does not exceed two weeks per year (the old treaty provided for four weeks).
Some practical notes may be helpful:
- If you are a tax resident in UK and you own a property in Spain and decide to rent it out, you should declare the income before the HMRC in the UK. But you are also liable to pay the Spanish tax as a non resident in Spain. It would be unfair if you had to pay twice. Therefore in situations like these, you should declare in Spain and then in the UK where you can deduct the tax paid in Spain. Unfortunately, if the UK tax rate for that type of income is higher, you will end up paying an excess.
- In respect of pensions, if you are currently living in Spain and are tax resident there, your UK state pension will probably be paid gross and you will need to declare this before the Spanish tax authority paying the appropriate taxes. However, if you get a UK government pension, the new treaty establishes that it will only be taxed in the country of origin (in the UK), regardless as to where you are tax resident.
Apart from the treaty provisions stated above, we cannot ignore the fact that one of the main purpose of these treaties is to prevent tax fraud. With this purpose and to facilitate the administration of statutory provisions against tax avoidance, the new treaty establishes a procedure for exchange of information between both countries. So, be informed, be warned!
The new double taxation treaty between Spain and United Kingdom is now in force.