On January 14 2013, Spain and the US signed the protocol amending the convention between the US and Spain for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, and its protocol (protocol). More than six years later, on July 16 2019, the US Senate ratified the Protocol. Once both countries complete their internal procedural steps, the updated treaty will enter into force on November 27 2019.
Chief among the changes brought about by the protocol is the clause stipulating the conditions residents in each country must meet in order to be entitled to the benefits of the convention (limitation on benefits), which, as with all tax treaties signed by the US, is particularly complex. The protocol amends and extends the convention's provisions in this regard.
Of the other updates made by the protocol, below we briefly cover those affecting cross-border dividends, interest and royalties paid as from November 27 2019, as well as capital gains obtained on transfers of shares as from that same date.
In terms of dividends, under the protocol, the withholding tax applicable in the payer's country will be a maximum of 5% if the beneficial owner of the dividend resident in the other state owns 10% of the voting rights of the company paying the dividend, and a maximum of 15% in the rest of the cases.
Nevertheless, dividend distributions are exempt from withholding taxes when: (i) they are derived from a stake representing at least 80% of the voting rights of the distributing entity and that stake has been held for a 12-month period; and (ii) the beneficial owner meets certain specific provisions. The withholding tax on dividends is also eliminated if the beneficial owner of the dividend is a pension fund that is exempt from tax or subject to a zero rate of tax in its home country.
Except in certain limited cases, the protocol eliminates the previous source-state withholding on cross-border payments of interest. Likewise, no withholding tax will generally apply to royalty payments made by Spanish or US companies to residents in the other state. We trust that the discussion surrounding the withholding rate applicable depending on the classification given to the particular royalty being paid will come to a close in the future.
Under the protocol, capital gains may only be taxed in the transferor's state of residence, except where the gains derive from the transfer of real property, shares or other rights that entitle the owner of such shares or rights to the enjoyment of immovable property situated in the other state. Before the protocol, the source state could impose tax on capital gains derived from the transfer of shares where the recipient of the gain, during the 12-month period preceding the transfer, had held at least 25% of the capital of the company.
Clearly, the tax landscape for US companies with interests in Spain, and vice-versa, has changed substantially. The implications of this protocol must be analysed, not only in respect of direct investments (where the protocol applies directly) but also where indirect investments have been made through third countries, so it is time to review existing investment structures.
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