After extensive consideration, on November 27th 2019 an amendment to the double taxation agreement between Spain and the United States will go into effect.
The amendment to the original agreement was signed in 1990 and was considered as an innovation at the time. In many cases, it improved the operation of taxation on businesses operating in both Spain and the United States.
Dividends, interests and transfers
The new legislation regarding double taxation between the two nations includes many key improvements to financing of investments, directly addressing taxation of dividends, interests, and transfer of subsidiaries.
Thus, starting on November 27th, distributed dividends from the United States will be exempt from withholding tax, only if the parent company’s stake in the subsidiary is at least 80%. Furthermore, a tax exemption for the transfer of shareholdings, thus eliminating a preexisting clause “substantial shareholding clause”, will later aid in the ease of disinvestment situations when necessary.
Similarly, this amendment generally becomes neutral in relation to capital by eliminating taxation at the source of interest in many cases. However, it is important to note that the “arm´s length principle”, which addresses transfer pricing is not affected by this amendment.
On the other hand, taxation on intangible goods and services will be no longer applicable after the new amendment goes into effect which brings a resolution to a long-standing conflict within the bureau of Tax Administration.
Finally, any additionally tax on the distribution of branch profits is reduced to zero and will categorized in the same fashion as a singularly owned subsidiary.
Arbitration, exchange of information and other clauses
The new amendment includes clauses related to management in relation to the exchange of information between contracting countries. This also extends to the incorporation of arbitration as a conflict management mechanism in mutual agreement procedures.
At the same time, the application of the conventional provisions is subject to the “anti-abuse” and profit limitation clauses. In some cases, they are also purpose of clarification and detail in this amendment.
The legislation agreed on between Spain and the USA also includes new nuances about the entities to which the Convention to Avoid Double Taxation applies. It includes the drafting of an “admission list”, with complex considerations. This requires a thorough review before determining whether an entity is eligible to for applicability. This mean that companies exclusively registered as holding companies or companies with parent companies headquartered outside of the European Union, could be excluded from this amendment.
In short, this new update of the Agreement signed between Spain and the United States will improve economic relations between the two countries, significantly reduce the tax burden of cross border transaction, and potentially increase the competitiveness of Spanish companies.