Double Taxation Treaties are international agreements that are designed to prevent the income, profits, or gains obtained by a person or legal entity from being taxed twice (or not at all) by different countries. It is simply an agreement between jurisdictions to agree on the best way to tax commercial operations between their tax residents. 

Treaties goals 

These treaties seek to promote international investment and foreign trade, since they offer clear rules and thus eliminate fiscal contradictions that could arise when tax regulations of different countries, which have never been reconciled, overlap.  

Treaties in Spain 

Spain has been consistent in adopting this model of treaties to avoid double taxation of its tax residents (physical and legal). The Iberian country aims to balance the attraction of foreign investment and the internationalization of Spanish companies, with the protection of their tax revenues.  

As a side effect of this model, Spain has aligned itself with international standards, particularly with the guidelines of the Organization for Economic Cooperation and Development (OECD), thus enhancing its reputation as a reliable and transparent partner.  

Through these agreements, it seeks not only to avoid double taxation, but also to prevent tax evasion and avoidance, guaranteeing a fair distribution of tax revenues among the jurisdictions involved. Moreover, it is added to legal certainty, since the investor will have an international treaty that will determine the tax burden of his investment. 

Main destination of agreements 

These treaties are particularly useful for encouraging investment in Latin America because they eliminate the fiscal uncertainty that may arise due to local criteria, and in some cases reduce the tax burden on Spanish investors seeking to expand in this region.  

Latin America is a strategic destination for Spanish companies due to its emerging markets and growth potential. With almost 700 million people, this market offers 52% more consumers than the entire population of the European Union. Furthermore, only considering Mexico, Brazil and Colombia, there is already access to a market with 8 times more population than in all of Spain. 

That is why, through these treaties, Spain can offer more competitive tax conditions, facilitating the repatriation of profits and reducing operating costs. In addition, these treaties promote tax cooperation and the exchange of information, which reinforces transparency and legal certainty for investors. 

These treaties operate through various mechanisms to avoid double taxation, including: 

• Tax exemption: one of the countries waives the right to tax certain types of income. Therefore, the other nation benefits from the collection of the economic benefit.  

• Tax credit: the taxpayer is allowed to deduct taxes paid abroad in their country of residence. This makes it possible to avoid double taxation on the same income, due to inconsistencies in the collection methodologies in the countries that are part of the interaction.  

• Tax rate reduction: limits are set on the tax rates applicable to certain income, especially on passive income such as dividends, interest, and royalties. In many cases, it implies a lower payment for withholding in the accreditation of this type of income.  

Spain has adopted a modern and flexible approach in its treaties, relying heavily on the OECD Model Convention, albeit with certain specific adaptations to protect its tax interests.  

Not all treaties are identical, and it is necessary to analyze each case specifically in order to reach specific conclusions.  

Main rules on DTT

As a central point, the OECD model establishes clear rules for resolving tax residence conflicts. This is extremely important, since tax residence is decisive in defining whether the agreement applies. These rules include: 

• Tax residence: the criterion of tax residence is fundamental. If a person or entity is considered a resident in both countries, tie-breaking rules apply based on factors such as permanent residence, center of vital interests, and nationality. 

• Passive income: to prevent abuses, Spanish treaties often include anti-abuse clauses that limit the benefits of the treaty in cases of aggressive tax structures. The objective, again, is to charge double taxes, not to cause double non-taxation.  

• Dispute resolution: treaties include mutual agreement and arbitration procedures to resolve tax disputes between countries. 

Spain has signed more than 90 DTTs with countries around the world, covering a wide range of jurisdictions in Europe, America, Africa and Asia. In the case of Latin America, it has them with Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Dominican Republic and Uruguay, among others.  

Spain’s model for Double Taxation Treaties reflects a balance between promoting international trade and protecting national tax interests. Through its numerous agreements, Spain seeks to facilitate the mobility of capital and people, while implementing effective measures to prevent the abuse of these tax benefits.  

However, in its application there will always be local challenges to consider, such as obtaining the tax residence certificate or the local interpretation of the rules. 

The increase in agreements through Treaties to Avoid Double Taxation requires multinational companies and investment funds to stay informed about them. Therefore, if you need efficient and secure management of your tax obligations in LATAM, rely on our local expertise with a global vision to avoid problems when filing taxes. 

About Auxadi 

Auxadi offers international accounting, tax, payroll, and Corporate Legal Services to multinationals and funds in over 50 jurisdictions, with 22 wholly-owned subsidiaries worldwide. Our experience and global presence allow us to provide tailored tax solutions, ensuring efficient management in compliance with local tax regulations.    

Contact us today and discover how we can facilitate your international expansion.