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Tax Treaty Considerations for Expats in Spain

Submitted: April 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Spain, and intend bring money earned from them into Spain during your stay. They also apply if you build up some investments in Spain during your stay, and intend to leave them there after you have left Spain. Spain has the wide network of tax treaties in force with over 80 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in Spain; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries.

The withholding tax rate in Spain on dividends sent to a country without a tax treaty is 21%, if sent to a country with a tax treaty they are generally reduced to between 10% and 15%.

The withholding tax rate in Spain on interest sent to a country without a tax treaty is 21%, if sent to a country with a tax treaty they are generally reduced to between 5% and 15%.

The withholding tax rate in Spain on royalties sent to a country without a tax treaty is 24.75%, if sent to a country with a tax treaty they are generally reduced to between 5% and 15%.

Spain’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge Spanish residents on dividends, interest and royalties to between 5% and 15%. However for the actual applicable amount, you will have to read the relevant treaty itself.

A table showing the Spanish withholding tax rates for most of Spain’s tax treaties is available in Appendix IV of this document. For the complete rules and rates it is necessary to read the treaty itself. These can generally be found on Google using the search string “Spain tax treaty other country”.

Expats should be aware that Spain maintains a list of tax havens for which special rules apply. For instance, if you are a resident of another EU country, living as a non-resident in Spain, receiving interest income from a tax haven, you will not be exempt from tax.

Prior to arriving in Spain you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-Spain country to another to reduce the tax rate paid.

If your home country has a generally lower rate of tax than Spain, you may be able to use the residency definitions in the treaty to show that you are still a tax-resident in your home country. By doing this you may avoid paying some Spain tax on overseas income from work outside Spain and non-Spain dividends, interest, royalties and capital gains.

If your home country has a generally higher rate of tax than Spain, you may benefit by becoming tax-resident in Spain as early as possible. At the end of your stay in Spain you can also rearrange your affairs to ensure that any ongoing income from Spain employment or investments is also taxed at the lowest rate possible in the future.

 

 




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