New Spain-UK Tax Treaty
4 Oct. 2013
Signed in London last 14th of March and expected to enter into force in the next coming three months, after being ratified by both States, it will replace the old 1975 Tax Treaty with some significant changes of which we highlight the following:
New taxation on the disposal of Spanish Real Estate Companies (art. 13). Capital gains derived from the transfer of shares on companies for which more than 50% of their value is based on real estate may be taxable in the State where the property is located. Unlikely, current Tax Treaty provides that a UK resident cannot be taxed in Spain when selling shares on said kind of companies.
Wealth tax (art. 21). Shares or rights on companies for which more than 50% of their value is based on real estate and shares or other rights which directly or indirectly allows the enjoyment of immovable property may be taxed in the State where the property is situated. According to the current Tax Treaty, only direct ownership of Spanish property can be taxed as Wealth Tax in Spain.
Recognition of Trusts (art. 3). The new Tax Treaty includes UK Trusts (resident of the UK under its domestic law) in the definition of “persons”. Trusts are disregarded for tax purposes in Spain (look-through regime) but now they will qualify to benefit from the tax treaty provisions when the income is taxed either in Spain or in UK.
Art.20. The residents of Spain who are beneficiaries of a UK Trust will be taxed in Spain on the gross amount of income they receive or are entitled to received from the trust. Spain shall eliminate the double taxation through the foreign tax credit method.
Reduction of withholding taxes (art.10, 11 and 12). Interests and royalties withholding tax rates have been reduced from 12% and 10% respectively to 0%; the dividend withholding tax rate has been reduced from 15% to 10% in general (for portfolio investors) and from 10% to 0% for qualifying companies (10% of the capital in case of direct investors) and pension schemes.
Residence and remittance basis rules (art.23). The tax reductions or exemptions laid down by the new treaty will apply only in the source state when the income is taxed in the other state. UK non-domiciled are taxed under the remittance basis regime so no exemption or reduction would apply to foreign income or gains not remitted.