What are double taxation agreements?
Double taxation agreements (DTAs) are treaties between two countries designed to prevent the same income or gain from being taxed twice: once in the country of origin and again in the taxpayer’s country of residence. Their main goal is to encourage international investment and provide legal certainty for investors.
Currently, Spain has 103 agreements signed, 99 of which are in force. Five others are in the process of being ratified (Bahrain, Montenegro, Namibia, Peru, and Syria). Additionally, agreements with countries such as Austria, Belgium, Canada, China, India, Japan, Mexico, the United Kingdom, and Romania have been renegotiated.
What are they used for?
- They prevent double taxation on income such as salaries, dividends, interest, or capital gains.
- They determine which country has the right to tax certain types of income.
- They facilitate cooperation between tax authorities for information exchange and to combat international tax fraud.
What happens if no agreement exists?
Without an agreement, the same income may be taxed in both countries, which increases the tax burden and can discourage international investment.
How do DTAs help avoid paying taxes twice?
DTAs allow for:
- Exemptions: One country may not tax a type of income that has already been taxed in the other country.
- Tax credit: The country of residence grants a credit for taxes paid abroad, reducing the effective taxation. In practical terms, this means you can deduct taxes paid abroad on your Spanish Income Tax return (if you are required to file one in Spain).
Are there limits to the deduction of foreign taxes?
Yes, the deduction or credit for foreign taxes is generally limited to the tax that would be payable in Spain on that same income. You cannot deduct more than what would be owed in Spain.
What documentation is needed to prove taxes were paid abroad?
Typically, you need:
- Tax certificates issued by the foreign tax authority.
- Tax reports or proof of payment of taxes in the country of origin.
- Documentation clearly identifying the type of income and the amount taxed.