International double taxation refers to a situation in which a taxpayer is taxed on the same income in more than one country. This phenomenon can affect both in Spain, foreign residents and non residents, creating tax complexities. We explain everything in detail below.
We must understand how it works in the Spanish context, as there are regulations and agreements that seek to mitigate this problem. For example, income earned by a foreigner in Spain may be subject to taxation in their country of origin and in Spain, giving rise to double taxation.
Concept and types of international double taxation
International double taxation occurs when the same income is taxed by two different jurisdictions. This situation becomes a challenge for taxpayers who generate income in several countries, as it can result in an excessive tax burden.
In order to fully understand how these tax duplications occur so that they can be managed correctly, a consultancy for expatriates and foreigners such as Taxmind – JDV Asesores is the best guarantee of control and accurate management and execution.
Types of international double taxation
We describe them below so that you can easily tell them apart:
Legal double taxation
The first category is legal double taxation, which occurs when the same income is taxed in two countries.
For example, if a resident of Spain receives dividends from a French company, those dividends may be taxed in both France and Spain. This means that the taxpayer is paying tax on the same income in two different places.
Economic double taxation
Another type of international double taxation is economic double taxation, which affects the income of individuals or entities that receive income in two different jurisdictions. This generally impacts those who receive dividends or profits from non-resident companies.
In a typical case, a Spanish investor who receives dividends from a company located in a country that does not have a double taxation agreement could face double taxation.
Example of legal double taxation
A Spanish worker who works temporarily abroad and must pay tax on their income in both countries.
Example of economic double taxation
A Spanish citizen who receives interest from a bank account abroad, where local taxation applies, and in Spain.
These situations highlight the importance of having a solid understanding of the tax laws of the different jurisdictions involved. The existence of double taxation agreements plays a key role in mitigating these tax conflicts, offering solutions and mechanisms that allow taxpayers to better manage their tax obligations.
Regulatory and tax framework in Spain
The Spanish tax system includes a series of provisions designed to regulate international double taxation, which contribute directly to creating a fair and attractive tax environment for foreign investors. In this regard, the 2014 Corporate Income Tax Law (LIS) is a fundamental pillar, specifically Articles 31 and 32.
This legislation allows taxpayers to claim deductions for taxes paid abroad. Specifically, Article 31 of the LIS establishes a clear framework for legal double taxation, allowing the deduction of tax effectively paid abroad, provided that it does not exceed the tax that would be payable in Spain on the same income. Article 32, meanwhile, focuses on economic double taxation, applicable to dividends and shares in profits distributed by non-resident entities.
Basically:
- The deduction for tax paid abroad does not apply to those that are not actually paid, such as exemptions or allowances.
- The legislation also takes into account international agreements that may limit the deduction to the amount established in those agreements.
As taxpayers, whether we are individuals or legal entities, we must be aware of these regulations in order to optimise our tax burden. Otherwise, we run the risk of paying more tax than we actually owe. If we are advised and represented by an international consultancy for expatriates and foreigners such as Taxmind, we will be up to date and protected as they are experts in the tax laws of our country of origin and our country of residence in Spain.
It is important to note that the regulatory framework is complemented by international agreements that seek to mitigate the effects of double taxation.
Conventions to avoid international double taxation
Agreements to avoid double taxation are bilateral and multilateral agreements that establish a legal framework to regulate the taxation of income generated in one country by residents of another. In Spain, as we have already pointed out, the network of tax agreements is extensive and contributes significantly to minimising the risk of being taxed in multiple jurisdictions.
These treaties usually contain provisions that allow taxpayers to benefit from tax reductions or exemptions on certain types of income. This particularly affects income from dividends, interest and royalties, which are the main types of income that often give rise to double taxation issues.
It is important to note that each agreement has its own rules, but they generally cover aspects such as:
- The taxpayer’s country of residence has the right to tax the income.
- The country of origin of the income may withhold a percentage of it, which is usually lower than the standard tax applied to nationals.
- Mechanisms are established for the exchange of tax information between countries to ensure transparency and tax compliance.
Companies and individuals residing in the UK should familiarise themselves with the agreements that their country of origin has established. This understanding allows for more efficient management of tax obligations and investment planning. If there is no agreement, the internal regulations of each country will apply.
Double taxation deductions in the tax return
The international double taxation deduction is a mechanism that allows taxpayers to reduce their tax burden when they have been taxed in several countries on the same income. This process is particularly relevant for those who earn income abroad and are subject to taxation in Spain.
Spanish taxpayers may benefit from this deduction provided they meet certain requirements. Tax regulations stipulate that tax paid abroad may be deducted from the total tax liability in Spain. This is intended to prevent taxpayers from facing an excessive tax burden.
Please note:
- The actual amount paid abroad as tax of an identical or similar nature to corporation tax may be deducted.
- The deduction may not exceed the tax liability that would have been generated if the income had been earned in Spain.
- Deductions for taxes that have not actually been paid, such as exemptions or rebates, will not be accepted.
Rigorous record keeping
It is important for taxpayers to keep a constant record of taxes paid abroad, as this information is essential for the deduction process. Applicable deductions must be correctly reflected in your tax return, ensuring that all amounts and items are accurate.
Foreigners residing in Spain who receive income from their countries of origin should be aware of the tax agreements that Spain has established with other countries. These agreements can facilitate better application of deductions and ensure that taxpayers do not pay more than they owe.
Case studies and relevant examples
The application of international double taxation can be observed in various situations affecting taxpayers in Spain. Below are some examples illustrating how this situation can arise and in which cases it could apply.
☑️ Dividends from a foreign company
A resident of Spain receives dividends from a company based in the United Kingdom. In this case, the United Kingdom may tax that income, and Spain may also do so. If international double taxation applies, the taxpayer may deduct the tax paid in the United Kingdom when declaring their income in Spain.
☑️ Rental income from properties abroad
Let’s imagine that a person has a property rented out in France. This income is taxed in both France and Spain. The owner may benefit from measures that mitigate the tax burden, depending on the agreements between the two countries.
☑️ Expatriate workers
A Spanish national working in Switzerland who pays tax on their salary in that country may face double taxation when they return to Spain. However, thanks to bilateral agreements, they could avoid paying double tax on the same income if they comply with the relevant regulations.
☑️ Benefits for non-resident companies
A company in Spain that receives income from a subsidiary in Germany could experience double taxation. In this scenario, tax is levied on the profits in Germany and again in Spain. However, if there is a double taxation agreement, the company may only be required to pay tax in one of the two countries.
Exceptional situations
On the other hand, there are situations where international double taxation does not apply. For example, if a Spanish taxpayer receives an inheritance from a relative residing in a country with which Spain has an agreement that exempts inheritance tax, double taxation will not apply in this specific case.
Implications and recommendations for taxpayers in Spain
The tax implications for taxpayers in Spain facing international double taxation can be significant. Expats, both resident and non-resident, should be aware of local tax regulations and the implications of generating income in other countries. This translates into the need for proper tax planning to avoid excessive payments and comply with current legislation.
Identifying possible deductions and understanding the applicable agreements is therefore essential.
Here are some important aspects that taxpayers should consider:
- Analyse the application of agreements to avoid double taxation between Spain and the country of origin of your income.
- Consult a specialist professional to find out what deductions can be applied in your tax return.
- Be aware of tax deadlines and comply with filing obligations in both Spain and the country of origin.
Conclusions
We have learned to identify and understand international double taxation, a concept that occurs when a taxpayer is taxed on the same income in more than one country.
Knowledge of tax regulations not only helps mitigate risks, but also promotes greater efficiency in investment management. We must bear in mind that incorrect reporting of foreign income can result in severe penalties. It is therefore essential to keep detailed records of income generated and taxes paid.
At Taxmind, we recommend periodically reviewing your personal tax situation, especially if there are changes in the tax legislation of the countries involved. As an international tax consultancy in Barcelona, we can provide updates on any changes that may affect your tax burden.
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