Protocol amending the current US-Spanish Tax Treaty
On January 14, 2013 the US and Spain signed a new protocol (the “Protocol”)
amending the current 1990 tax treaty for the avoidance of double
taxation (the “Treaty”).
The Protocol includes significant changes to foster the efficiency of
reciprocal direct investment in the US and Spain. In particular, it
brings withholding treaty rates and other provisions in line with the
tax treaties in force between the US and the most significant European
Union countries, effectively eliminating the need for complex and costly
investment planning structuring.
In most cases, the Protocol eliminates taxation at source, creating
relevant savings and increasing net yields. For dividends a 0%
withholding rate applies for corporate shareholders controlling 80% of
the voting stock (5% for holdings of 10% or more). Interest and
royalty payments will not be longer subject to withholding taxes (limited
exceptions apply in connection with certain US source interest).
Capital gains will only be taxed at source on the disposal of real
estate and real estate holding companies (subject to certain
The Protocol also reinforces technical mechanisms to avoid double
taxation through Mutual Agreement Procedures (MAPs) and provides for
arbitration to resolve tax issues. The treaty´s exchange of information
clause is updated to current standards for this type of clauses.
The new wording of the Limitation of Benefits (the “LoB”) clause,
which includes favorable exceptions such as the “headquarters company”,
and the regulation of fiscally transparent entities and funds are also of interest.
The principal terms of the Protocol are summarized below.
The Protocol leads to a significant reduction of taxation at source,
as the current Treaty provides for a 10% withholding tax when the
company receiving the dividend controls 25% of the voting rights, and
15% in other cases.
In accordance with the Protocol, withholding tax rates on dividends
i. 0% if the beneficial owner is a company which directly or
indirectly owns shares representing more than 80% of the voting stock,
and such shareholder has held the shares in the distributing company
for a minimum period of 12 months prior to the distribution.
ii. 5% if the beneficial owner of the dividends is a company owning
10% or more of the voting stock; and
iii. 15% in all other cases;
Specific regulations apply to Spanish SOCIMIs and US REITs, and
certain tax exemptions apply to distributions to pension funds.
In general, taxation at source is eliminated and thus no withholding
taxes will apply to interest payments. Specific rules apply for US
source contingent interest and loans related to US real estate mortgage
Remuneration of a profit participation loan will qualify as interest
under the Protocol, also benefiting from the exemption from withholding
The new provisions represent a dramatic change given that US lenders
(not acting through PEs in Spain) will be fully exempt from withholding
taxes on interest paid by Spanish borrowers, regardless of the term of
Taxation at source is eliminated (except for permanent establishments)
and thus no withholding tax will apply to royalty payments.
The measure is expected to be widely applauded by IT companies,
pharmaceutical groups, multinational manufacturing companies in Spain
and others. The Protocol’s entry into force will eliminate current
withholding taxes ranging from 5 to 10%.
4. Capital gains
The Protocol significantly alters the approach to the sourcing and
taxation of capital gains.
No taxation at source will apply on capital gains, except upon the
disposal of real estate assets or shares in companies holding real
estate assets or time-share rights (which, in Spain, would be subject to
a 21% capital gains tax).
Furthermore, gains deriving from the transfer of licenses and
intangible property will qualify as capital gains (and not as
royalties), therefore exempt from taxation at source.
5. Branch tax
Article 14 of the Treaty, regarding the right to impose a 10% branch
tax, will be eliminated. However, under article 10 of the Treaty, as
amended by the Protocol, the US taxation of the “dividend equivalent
amount” and the imposition of Spanish branch tax (up to a maximum rate
of 5%) will be permitted in limited circumstances.
6. Limitation of benefits
The Protocol provides for a significantly amended limitation of
benefits clause. The wording of the new clause covers numerous
situations in detail. Among others, the following features are worth
(i) the traded-company exception, by virtue of which a listed
company automatically benefits from the Treaty, will now apply to
companies listed not only in the US or Spanish stock exchanges, but
also on “recognized stock exchanges” such as those of London,
Frankfurt, Amsterdam, Toronto, Mexico City or Buenos Aires.
(ii) the inclusion of a “headquarters company exemption”, affording
the Protocol’s protection and benefits to entities qualifying as
headquarters for multinational groups (i.e. providing overall
supervision to at least five jurisdictions, amongst other requirements);
(iii) a “permanent establishment triangular clause”, excluding
permanent establishments located in third countries from the benefits
of the Treaty and the Protocol if the PE is taxed at a reduced rate
(i.e. less than 60% of the general tax applicable to the parent
7. Pension funds
The Protocol allows for the possibility of rolling the investment
over to pension funds of the other contracting State (i.e. cross-border
roll over) without triggering taxation, as taxation will be contingent
upon the effective payment or distribution to the beneficiaries.
8. Mutual Agreement Procedure and
Controversies regarding the interpretation of the Treaty and the
Protocol will be resolved through MAPs.
In addition, the Protocol provides for mandatory arbitration to
resolve matters submitted to a competent authority. Regulation of the
arbitration procedure is extensive and detailed. The resolution of the
arbitration panel -composed of three members- will be, with exceptions,
9. Exchange of information
The exchange of information clause is updated to comply with current
standards. No explicit reference is made to the future implementation of
FATCA provisions. It is important to note that Spain and the US have
agreed to implement FATCA through domestic reporting and reciprocal
automatic exchange of information, also based on the Treaty currently in
force. The new wording of the Treaty, as amended by the Protocol, should
be sufficient to cover FATCA implementation.
10. Puerto Rico
In addition to the Protocol, a Memorandum of Understanding (MOU) has
been signed by the US and Spain indicating that specific measures to
avoid double taxation on investments between Spain and Puerto Rico will be adopted.
11. Fiscally-transparent entities
The Protocol and the MOU slightly amend the 2006 Competent Authority
Agreement entered into by the US 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 in the US or Spain or in a State that has entered into an
agreement for the exchange of tax information. It should be noted that
the 2006 Competent Authority Agreement did not include the latter´s
12. The Protocol’s entry into force
The Protocol will enter into force three months after compliance with
the domestic US and Spanish procedures required for approval and
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