Article provided by Auxadi
After a rather extensive process, extended for more than five years, next November 27th will enter into force the Protocol amending the Convention to Avoid Double Taxation between Spain and the U.S., initially agreed by the governments of both countries in 2013.
This text updates the original Convention, signed in 1990, and introduces very relevant innovations that, in many cases, improve the taxation of business operations between Spain and the United States.
Dividends, interests and transfers
The new protocol improves several chapters, among them the one relating to the structuring and financing of investments, specifically the section about taxation of dividends, interest and transfers of subsidiaries.
Thus, since November 27th, distributed dividends from the USA will be exempt from withholding tax, as long as the parent company’s stake in the subsidiary is at least 80%. At the same time, the exemption for the transfer of shareholdings is generally established, eliminating the substantial shareholding clause. The latter will facilitate disinvestment situations if necessary.
Similarly, taxation at the source of interest is generally eliminated, and becomes neutral in relation to capital. However, it is important to remember that the financial structures of the investment must conform to the principles of arm’s length, a clause that does not change in the new Protocol.
As for intangibles, taxation on royalties is eliminated, which definitively resolves a complex problem and a source of permanent conflict with the Tax Administration in the past.
And last but not least, the additional taxation on the distribution of branch profits disappears, and from now on they will be equated with structuring via a wholly-owned subsidiary.
Arbitration, exchange of information and other clauses
The new text introduces improvements in aspects related to management between contracting countries; among others, those relating to the exchange of information, which is extended, and the incorporation of arbitration as a conflict management mechanism in mutual agreement procedures.
At the same time, it should be pointed out that the application of the conventional provisions is subject to the “anti-abuse” and profit limitation clauses, which in some cases are also purpose of clarification and detail in this Protocol.
The text agreed by Spain and the USA also includes new nuances about the entities to which the Convention to Avoid Double Taxation does apply. It includes the drafting of an “admission list”, with complex considerations, which requires an requires a thorough review before determining whether an entity is finally eligible to invoke the Convention. Thus, pure holding companies or companies with parents outside the EU (Brexit apart) could be affected and left out.
In short, this new update of the Agreement signed between Spain and the United States will improve economic relations between the two countries, significantly reducing the tax burden of cross border transactions and thereby increasing the competitiveness of Spanish companies.