Paying Tax Twice? How Spain's Double Taxation Treaties Protect Non-Residents

For any non-resident earning income from Spain, a major concern looms: "Will I be taxed here in Spain and again in my home country on the same income?" This is the definition of double taxation, and without a system to prevent it, international investment and work would grind to a halt. Fortunately, there is a powerful legal framework designed specifically to solve this problem: Double Taxation Treaties (DTTs), also known as Double Taxation Agreements (DTAs).

Spain has an extensive network of DTTs signed with over 90 countries around the globe, including the US, the UK, Canada, Germany, France, and most major economies. These treaties are complex legal documents, but their purpose is simple: to allocate taxing rights between two countries to ensure income is taxed fairly and only once. For a non-resident, understanding that these treaties exist and how they work is fundamental to protecting your income. This guide will explain the role of DTTs and how they provide crucial relief for non residents with financial ties to Spain.

The Core Purpose of a Double Taxation Treaty

A DTT is a bilateral agreement between two countries that aims to achieve several goals:

1. Prevent Double Taxation: Its primary job is to establish rules that determine which country has the primary right to tax a specific type of income (e.g., salaries, dividends, pensions, rental income).

2. Provide Tax Certainty: It creates a stable and predictable tax environment for individuals and businesses operating in both countries.

3. Reduce Taxes: Treaties often provide for lower withholding tax rates on things like dividends and interest than what is stipulated in a country's domestic law.

4. Prevent Tax Evasion: DTTs include provisions for the exchange of tax information between the authorities of the two countries to combat tax fraud.

How Do DTTs Actually Prevent Double Taxation?

Treaties use a set of rules to decide which country gets to tax what. For each type of income, a DTT will typically state that it is taxable in:

• The Country of Source (where the income is generated, e.g., Spain for rental income from a Madrid apartment).

• The Country of Residence (where the taxpayer lives).

• Or, in some cases, both.

When income can be taxed in both countries, the treaty provides a mechanism to eliminate the double tax, usually in one of two ways:

1. The Exemption Method: The country of residence agrees not to tax the income that has already been taxed in the country of source. For example, the treaty might state that your home country will simply exempt the rental income you earned and paid tax on in Spain.

2. The Credit Method (Most Common): The country of residence agrees to tax your worldwide income but will allow you to deduct the tax you already paid in the source country from the tax bill in your home country. This is the most common method.

A Practical Example: The Foreign Tax Credit

Imagine you are a UK tax resident and you own a flat in Marbella that you rent out.

• Spain is the source country. Under the Spain-UK DTT, Spain has the primary right to tax income from immovable property located in Spain. You will file a Non-Resident Income Tax return (Form 210) in Spain and pay tax (at 19%) on your net rental income.

• The UK is your residence country. The UK taxes its residents on their worldwide income, so you must also declare this Spanish rental income on your UK tax return.

• To avoid double taxation, the UK tax authorities will allow you to claim a "foreign tax credit" for the tax you paid to the Spanish Agencia Tributaria. So, if your UK tax liability on that income is £3,000 and you already paid the equivalent of £2,500 in Spain, you would only owe the remaining £500 in the UK.

To make this claim, you will need official proof of the tax paid in Spain. This is a key service that a tax lawyer in Spain provides—ensuring your taxes are filed correctly and obtaining the necessary certificates for you to use in your home country.

How Treaties Reduce Withholding Taxes

Another major benefit of DTTs is the reduction of withholding taxes on passive income like dividends and interest.

• Spain's domestic law dictates a 19% withholding tax on dividends paid to non-residents.

• However, the Spain-US DTT, for example, states that the maximum withholding tax on dividends is 15%.

• This means a US resident receiving dividends from a Spanish company is entitled to a refund of the 4% difference.

This refund is not automatic. The Spanish company will withhold the standard 19%. The investor must then formally apply to the Spanish Tax Agency for a refund under the treaty, providing a certificate of tax residence from the IRS. A lawyer in Spain can manage this entire reclaim process on your behalf.

Proving Your Eligibility

To benefit from any provision of a DTT, you must prove to the Spanish authorities that you are a genuine tax resident of the other treaty country. The only way to do this is by obtaining a Certificate of Tax Residence from the tax authority in your home country (e.g., HMRC in the UK, the IRS in the US). This official document is valid for one year and is the key that unlocks treaty benefits.

Navigating the specific articles of a treaty to understand how it applies to your pension, capital gains, or business income requires professional expertise. The language is dense and legalistic. An experienced tax lawyer in Spain for non residents can interpret the treaty in the context of your specific circumstances, ensuring you pay the absolute legal minimum amount of tax and not a cent more.

Don't pay tax twice. If you have income from Spain, let us help you take full advantage of the protections offered by double taxation treaties. Book an appointment to discuss your situation with our international tax experts.