On the 15th May 2014 the Spanish Official Gazette published the new Convention signed between Spain and the United Kingdom for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital which was signed in London on the 14th March 2013 and that will come into force on the 12th June 2014.
This Convention replaces the existing one dating from 1975 and that needed a revamp to suit the current needs and the convention model of the OECD.
Article 2 specifies that the agreement applies to taxes on total income and on total capital, or on elements of income or capital, including taxes on gains from the alienation of movable or immovable property, and those levied on capital appreciation imposed by each Contracting State, its political subdivisions or local authorities, irrespective of the manner in which they are levied. The Convention, unlike the former one, does not specify a closed list of taxes that apply, but it lists the current ones and leaves the application open to those that could be established later.
Let’s highlight the most relevant changes in the new Convention
COMPANIES WITH MORE THAN 50% OF THEIR VALUE IN REAL ESTATE
One of the major changes refers to the companies that own property and to the taxation in the country where the property is located:
Article 21 of the Convention focuses on capital, and paragraph 4 establishes that the capital constituted by shares or other rights in a company or any other body of persons might be taxed in Spain, providing that more than 50% of their value comes directly or indirectly from immovable property situated in the country, or by shares or other rights which entitle its owner to a right to enjoyment of immovable property located in Spain. Thus, the possession of high-valued property in foreign companies will not carry on getting the desired result of avoiding the payment of Capital tax.
On the other hand, Article 13 regarding capital gains, states that may also be taxed in Spain the proceeds from the alienation of shares or other rights, deriving more than 50% of their value directly or indirectly from immovable property situated in the country. The previous Convention left untaxed in Spain the transmission of properties by selling the shares in the company that owned them.
Finally, in accordance with Article 6 any income derived from the direct use, the letting or any other use of the right of enjoyment of the property is also taxable in Spain where it is made by the owners of shares or other rights in the companies that are actually entitled for the use or enjoyment of the property.
RESIDENTS NOT DOMICILED
In the UK there is a possibility of being a resident but not being domiciled. It is what is known as the NON-DOMS. The residence would be the place where you actually live at that present time and the domicile is the place that to which you are linked by your origins or by family ties and to where you would eventually return.
In these cases and with the system of taxation known as “remittance basis”, the income generated in Spain that was not sent to the UK but kept here, was not taxed in the UK, but neither did here or was taxed at a reduced rate. The new Convention establish by Article 23 that the exemptions and reductions to income not taxed in the UK as a result of the system of “remittance basis” do not longer apply. This will ensure that the income is taxed either in the UK or in Spain.
RECOGNITION OF TRUST
Article 3 of the Convention contains a number of general definitions of terms that are used in its articles. The novelty is that it mentions the word “Trust” (translated in the Spanish version as “Fideicomiso”). Specifically, Article 3.1.d) says: the term “person” includes an individual, a trust, a company and any other body of persons.”
The legal concept of Trust, typical of the Anglo-Saxon systems, does not exist in Spanish law. Traditionally, it had been considered that the taxpayers were the beneficiaries (and not the entity itself). Now the legal personality of these entities is recognized in relation to the application of the Convention.
Residents in Spain who are beneficiaries of a British Trust may be taxed in Spain by the total amount of income received from the trust. Double taxation is eliminated by the foreign tax credit method.
REDUCTION OF WITHHOLDING TAX RATES
Interest and royalties, that with the previous Convention were taxed at source at 12% and 10% respectively, are now with the new Treaty free from withholding tax at source, so they will be taxed only in the state of residence of the recipient.
Likewise, the dividends received by a company for its involvement of over 10% in the capital of another company are now exempt from taxation at source (previously taxed at 10%), and so they are those derived from a pension scheme. The rest of the dividends have a withholding tax at source that is reduced from 15% to 10%.
MUTUAL AGREEMENT PROCEDURE AND ARBITRATION
For those cases where a person does not agree with the actions of one or another State in the implementation of this agreement and in the event that the two States cannot resolve the case by mutual agreement within two years from the presentation of the case by the concerned individual, they may submit the case to arbitration at the request of the taxpayer, previously matching a number of requirements.
INFORMATION EXCHANGE
Article 26 establishes the need and obligation of the exchange of information that may be of interest between the authorities of the two signatory States to the effect of applying the provisions of the Convention and with the main objective of preventing fraud and tax evasion. This article is in line with expectations and model recommendations of the OECD Convention.
Luis M. Vicente Burgos
VICENTE & OTAOLAURRUCHI ABOGADOS
