16 October, 2019

Not only bad news from the United States

While we have been bombarded almost daily with the unfair increase in custom duties on olive oil and wine products to the United States (“US”), we have also received good news from the US. 

On 16 July 2019, the US Senate finally ratified (after years of suspension by the US Senator Rand Paul) the protocol amending the double taxation treaty entered into between the US and Spain on 14 January 2013 (“Protocol”). It is expected to be in force on 27 November 2019. 

Said Protocol introduces material changes. Particularly, the following amendments should be noted:

1. Permanent establishment

Building sites, construction or installation projects, installations or drilling rigs or ships used for the exploration or exploitation of natural resources, whose duration exceeds 12 months (instead of 6 months), shall be deemed as a permanent establishment for these purposes.

2. Dividends

Dividends would not be subject to withholding tax, provided that the following requirements are met: 

• The beneficial owner is resident for tax purposes in the other contracting state and holds, directly or indirectly, at least 80% of the stake in the disbursing entity; and 

• Said stake has been held for at least one year. 

 If the above-mentioned conditions are not fulfilled, the applicable withholding tax rate would be 5% if the shareholding exceeds 10% and 15% for all other cases. 

Additionally, dividends would not be withheld if: 

• The beneficial owner is a pension fund (resident for tax purposes in the other contracting state), which is exempt from tax or subject to a zero tax rate; and

• They are not derived from the business activity carried out by pension funds or their associated entities.

The Protocol also limits the application of the reduced withholding tax rate (i.e. 5%) with regard to disbursements made by the following entities: (i) Spanish REITs, unless the beneficial owner holds less than 10% of the stake in the REIT, and (ii) Spanish investment institutions.

3. Interest and royalties

Interest and royalties would be subject to taxation only in the resident state, except for the following disbursements: 

• Contingent interest accrued in the US, which are not considered as portfolio interest under US law, may be taxed in the US up to 10% of the gross amount. 

• Excess interest over residual interest in real estate mortgage investment conduits may be taxed in the United States.

 4. Capital gains

Capital gains arising from transfer of shares would be subject to taxation only in the resident state. However, those obtained as a result of transfer of shares, which directly or indirectly entitle the owner to use and enjoy real estate properties, may be taxed in the other contracting state.

In addition, the specific provision regarding transfer of licenses and intellectual properties has been eliminated. Therefore, the transfer of these kinds of assets would trigger capital gains rather than royalties. Consequently, said capital gains would be exempt from withholding tax.  

5. Branch tax

The Protocol also eliminates the provision related to branch taxation. Hereon, it shall be treated according to the dividends section. Specifically, the tax rate should not exceed 5%. 

6. Limitation of benefits

It is an anti-treaty shopping provision intended to prevent residents of third countries from obtaining benefits under a treaty. 

In this sense, the benefits stated in the double taxation treaty shall only apply when the requirements established to be deemed as a “qualified person” are met. 

 The Protocol establishes new “qualified person” assumptions for listed companies, multinational groups and triangular transactions in order to be eligible to apply the double taxation treaty. 

7. Mutual agreement procedure 

An arbitration procedure has been introduced for when the contracting states do not reach a mutual agreement within two years of the starting date of the relevant case. The Protocol extensively regulates the provisions regarding said procedure.

8. Exchange of information

According to the Protocol, the contracting states are obliged to exchange and provide relevant tax information, even if it is not going to be used for tax purposes. 

 Overall, the changes introduced by the Protocol would improve the commercial relationship between US and Spanish entities. 

 Notably, (i) dividends exemption / reduced withholding tax rates and capital gains exemption would attract more direct investments; (ii) interest exemption would allow United States lenders to compete in better conditions and directly; (iii) royalties exemption would favor owners of intellectual property; and (iv) the mandatory arbitration provision would make disputes more efficient.

 We hope this way to facilitate investments between good friends and allies will be the way to lead our future relationships (instead of other bad tax news!!).

For more information on this topic please contact our Tax Partner Javier Prieto (


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