Double Taxation Convention (DTA): UK and Spain

The Double Taxation Convention (DTA) between the United Kingdom and Spain, signed on 14th March 2013 and effective from 12th June 2014, establishes a framework to alleviate double taxation concerns for individuals and enterprises operating across both Contracting States.

Covering various tax aspects, from residency determination to specific taxation of income streams such as dividends, interest, royalties, and capital gains, the Convention ensures fairness, transparency, and non-discrimination in tax matters. It provides mechanisms for tax relief, dispute resolution, and cooperation in tax collection while promoting clarity and predictability in tax obligations for residents and businesses in both jurisdictions.

Scope and Application

The initial two articles of the Convention explore its scope and applicability, specifying the individuals and types of taxes it encompasses. They clarify who is subject to the Convention and cover the various taxes governed by its provisions.

Article 1: Persons Covered

The Convention applies to persons who are residents of one or both of the Contracting States.

Article 2: Taxes Covered

The Convention covers all taxes related to income and capital imposed by a Contracting State, regardless of how they are imposed. The Convention applies specifically to taxes on income, capital gains, and capital appreciation. In particular, the Convention applies to:

• Income Tax on individuals;
• Corporation Tax;
• Income of non-residents;
• Capital Tax;
• Local taxes on income and capital.

These taxes imposed in Spain are referred to as 'Spanish Tax' in the Convention.

Similarly, in the United Kingdom, the following taxes are bound by the Convention:

• Income Tax
• Corporation Tax
• Capital Gains Tax

General Definitions

The third article of the Convention focuses on defining the relevant terms used within the document. These definitions are provided to ensure accurate interpretation of the Convention.

• The term 'Spain' means the island of Spain, including its territorial sea.
• The term' United Kingdom' means Great Britain and Northern Ireland.
• The terms 'a Contracting State' and 'the other Contracting State' mean Spain or the United Kingdom, as the context requires.
• The term' person' includes an individual, a company, and any other body of persons.
• The term' competent authority' means the Minister of Economy and Finance or his authorised representative in Spain and the Commissioners for Her Majesty's Revenue and Customs or their authorised representative in the United Kingdom.
• The term 'national' refers to any individual holding Spanish nationality, any British citizen, or a British subject who does not hold citizenship in any other Commonwealth country but has the right to reside in the UK. It also includes any legal entity recognised as such under the laws of the Contracting States.
• The term 'pension scheme' means any scheme other entity established in the UK which manages the right of its beneficiaries to receive income or capital upon retirement and the contributions to which are eligible for tax benefits in the form of reductions in the personal taxes in Spain. In the UK, the term refers to any plan established in the United Kingdom that is generally exempt from income taxation and operates principally to administer or provide pension or retirement benefits.
• The term 'offshore activities' means activities which are carried out offshore in a Contracting State in connection with the exploration or exploitation of the seabed and subsoil and their natural resources situated in that Contracting State.

Residency Status

Article 4: Resident

Article 4 of the tax Convention defines the residency status of a person, whether an individual or a company. A person is considered a resident in the UK for tax purposes if they are liable to tax in the UK due to their domicile, residence, place of management, place of incorporation, or any other similar criterion. However, the term 'resident' does not apply to those who are liable to tax in the UK only on income or capital gains from sources within the UK. The same definition is used to determine the residency status of individuals from Spain.

If an individual qualifies as a resident of both Spain and the UK under this definition, their residency status will be determined based on additional factors, including:

If all three of these tests fail, the question of residency will be settled by mutual Convention between the competent authorities of the two territories. Persons other than individuals will be considered residents of the State in which its place of effective management is situated.

In the context of the Convention:

Income, profit, or gain derived from a Contracting State through a partnership, trust, group of persons, or similar entity established in the other Contracting State and treated as income of beneficiaries, members or participants of that partnership, trust or other similar entity under the tax laws of that other Contracting State, shall qualify for benefits in the Convention if those beneficiaries, members, or participants are residents of that other Contracting State and meet other specified conditions in the Convention. This applies regardless of whether the income is treated as such under the tax laws of the first-mentioned State.

Income, profit, or gain derived from a Contracting State through a partnership, trust, group of persons, or similar entity established in the other Contracting State and treated as income of that partnership, trust or other similar entity under the tax laws of that other Contracting State, shall qualify for benefits in the Convention irrespective of whether the income is treated as the income of those entities, if such a partnership, trust or similar entity is a resident of that other Contracting State and meet other specified conditions in the Convention.

Income, profit, or gain derived through a partnership, trust, group, or similar entity in one Contracting State is treated as income by beneficiaries under the other Contracting State's tax laws and also considered as income by that entity under the first Contracting State's tax laws, can be taxed by the first State without limitations.

Specific Tax Provisions

Article 5: Permanent Establishment

Article 5 of the Convention defines the term 'Permanent Establishment' as a fixed business location where activities are wholly or partially conducted, such as a management office, branch, office, or factory. Additionally, a construction project qualifies as a permanent establishment if its duration exceeds twelve months.

Certain activities are excluded from the definition of permanent establishment, such as using facilities solely for storage or merchandise delivery or, maintaining a business location solely for purchasing goods or gathering information for the enterprise. However, these exemptions cease to apply if the enterprise or a closely affiliated entity engages in business activities at the same location or elsewhere within the same Contracting State.

Likewise, suppose an individual represents an enterprise and routinely finalises contracts within a Contracting State. In that case, the enterprise will be deemed to possess a permanent establishment there for any actions conducted by said individual.

An enterprise is not considered to have established a permanent establishment in a Contracting State merely by conducting business there through an independent broker or agent or due to control relationships between companies from different Contracting States. Furthermore, if a company resident in one Contracting State controls or is controlled by a company resident in the other Contracting State, neither company is regarded as constituting a permanent establishment for the other.

Article 6: Income from Immovable Property

Generally, income earned from immovable property in one Contracting State may be subject to taxation in the Contracting State where the property is situated. The definition of 'immovable property' aligns with the local law where the property is situated and explicitly excludes ships, boats, and aircraft.

Under the Convention, income from immovable property could originate from the direct use, letting, or any form of utilisation of immovable property is considered. This applies to individuals or enterprises that directly or indirectly possess shares or rights to enjoy the benefits from immovable property.

Article 7: Business Profits

Enterprise profits are typically taxed only in the State where they are earned, but if the enterprise operates in another Contracting State via a permanent establishment, the profits attributable to the permanent establishment may face taxation there. The attributable profits are the profits it might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities.

If one Contracting State adjusts the profits attributable to permanent establishment of an enterprise from another Contracting State and taxes the profits already taxed in the other Contracting State, the other Contracting State shall make an appropriate adjustment to the amount of tax charged on those profits to eliminate the double taxation. The competent authorities of both Contracting States will consult each other as necessary to determine such adjustments.

Article 8: Profits from International Shipping and Air Transport Businesses

In the case of enterprises operating in ships or aircraft in international traffic, such profits are taxable only in the Contracting State where the profits are made. The provision applies to profits from participation in a pool and a joint business of an international operating agency.

Article 9: Associated Enterprises

As per Article 9 of the Convention, an appropriate adjustment must be made by the Contracting States in regard to the tax on profits from associated enterprises. The provision applies in two scenarios:

• When an enterprise from one Contracting State is directly or indirectly involved in the management, control, or capital of an enterprise in the other Contracting State or
• When the same persons are directly or indirectly involved in the management, control, or capital of enterprises in both Contracting States.

If either of these conditions is met and the terms between the two enterprises differ from those between independent enterprises, resulting in unreported profits, those profits may be added to the taxable profits of the enterprise.

Additionally, if a Contracting State taxes profits of its enterprise that have already been taxed by the other Contracting State—and those profits would have accrued to the first enterprise under independent conditions—the other Contracting State will adjust the tax amount appropriately. This adjustment will consider the other provisions of the Convention, and the competent authorities of both Contracting States will consult each other if needed.

Article 10: Dividends

Article 10 of the Convention establishes that dividends paid by a company in one Contracting State to a resident of the other Contracting State can be taxed in that other Contracting State; such dividends can also be taxed in the company's resident Contracting State according to its laws.

However, if the beneficial owner of the dividends is a resident of the other Contracting State, the tax charge cannot exceed:

• 15% of the gross amount of the dividends where the dividends are paid out of income generated directly or indirectly from the immovable property by an investment vehicle which distributes most of its income annually and whose such income is tax-exempt;
• 10% of the gross amount of the dividends, in other cases.

Additionally, the dividends may be exempt from tax in the Contracting State of which the company is resident if:

• the beneficial owner of the dividends is a company which is a resident of the other Contracting State which controls at least 10% of the company paying the dividends; or
• the beneficial owner of the dividends is a pension scheme and a resident of the other Contracting State.

The term 'dividends' includes income from shares or similar rights that participate in profits or other income treated as dividends under the tax laws of the company's resident Contracting State. Furthermore, a company resident in one Contracting State cannot be taxed on dividends by the other Contracting State unless the dividends are paid to a resident of that other Contracting State or are connected to a permanent establishment there.

Article 11: Interest

Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State are taxable only in the Contracting State in which the interest is received.

However, if the beneficial owner of the interest carries on a business in the other Contracting State in which the interest arises through a permanent establishment located there, the exemption does not apply. Article 7 Permanent Establishment applies, instead.

The term' interest' refers to income from debt claims of any kind, regardless of whether they are secured by a mortgage or include the right to participate in the debtor's profits. This includes income from government securities, bonds, or debentures. However, it does not include any items treated as dividends under Article 10. Furthermore, any item treated as dividends under the earlier provision should be excluded from the definition.

Article 12: Royalties

Taxation on the royalties arising in Contracting States is dealt with in Article 12 of the Double Taxation Convention. For the purposes of the Convention, the term "royalties" refers to payments for the use of copyrights, patents, trademarks, designs, plans, secret formulas, or industrial, commercial, or scientific information.

Primarily, royalties arising in one Contracting State and beneficially owned by a resident of the other Contracting State are taxable only in that Other State.

However, if the beneficial owner has a permanent establishment in the Contracting State of origin, and the royalties are connected to it, provisions in Article 7 Permanent Establishment apply instead.

Article 13: Capital Gains

Gains made by a resident of one Contracting State from selling immovable property located in the other Contracting State, as mentioned in Article 6, can be taxed in the other Contracting State. However, gains made by a resident of one Contracting State from selling shares or similar interests (excluding shares that are substantially and regularly traded on a recognised stock exchange) that derive more than 50% of their value from immovable property in the other Contracting State can also be taxed in that other Contracting State.

Gains from selling movable property that is part of a business's assets, including gains from selling the entire business or its permanent establishment in the other Contracting State, can be taxed in that other Contracting State.

Gains from selling ships or aircraft or movable property related to the operation of such ships or aircraft by a business of one Contracting State operating in international traffic are only taxable in that Contracting State.

Importantly, Gains from the disposal of assets not described above will only be taxed in the Contracting State where the seller is a resident.

Article 14: Income from Employment

Salaries, wages, and other similar payments received by a resident of one Contracting State for employment are generally only taxable in that Contracting State unless the work is performed in the other Contracting State. If the employment is carried out in the other Contracting State, the income earned from it can be taxed there.

However, even if the work is done in the other Contracting State, the income will only be taxed in the resident's home Contracting State if all of the following conditions are met:

• The employee is present in the other Contracting State for no more than 183 days in any twelve-month period starting or ending in the relevant fiscal year.
• The payment is made by, or on behalf of, an employer who is not a resident of the other Contracting State.
• The payment is not charged to a permanent establishment that the employer has in the other Contracting State.

Additionally, income earned by a resident of one Contracting State for employment on a ship or aircraft operating in international traffic (except those operating solely within the other Contracting State) will be taxable only in the resident's home Contracting State.

Article 15: Directors' fees

Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.

Article 16: Income as Artists and Sportsmen

The income earned by a resident of a Contracting State as an entertainer, such as a theatre, television artist, or as a sportsman, from his personal activities in the other Contracting State may be taxed in that other Contracting State.

Article 17: Pensions

Pensions and other similar remuneration paid to an individual who is a resident of a Contracting State shall only be taxable in the Contracting State where he is a resident.

Article 18: Government Service

Remuneration, other than pensions, paid by the Contracting States to an individual for services rendered to that State shall be taxable only in that Contracting State.

However, such remuneration is taxable only in the other Contracting State if the services are rendered to the State and the individual is a resident of that State who is either a national of that State or did not become a resident of that State solely for the purpose of rendering the service.

On the other hand, pensions and other similar remuneration shall be taxable only in that State.

Article 19: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Contracting State where they are studying if they were a resident of the other Contracting State, and the payments come from outside the Contracting State where they are studying.

Article 20: Other Income

Article 20 of the Convention document specifies that income not dealt with in the previous articles, regardless of its source, is taxable only in the Contracting State of residence.

However, there are exceptions, notably when income is paid to a resident of one Contracting State from sources controlled by trustees or personal representatives who are residents of the other Contracting State. In such cases, the income is treated as arising from the same sources and in the same proportions as the income received by the trustees or personal representatives, with any tax paid by them on behalf of the beneficiary being treated as paid by the beneficiary.

Article 21: Capital

Where the capital in immovable property is owned by a resident of a Contracting State but situated in the other Contracting State, the capital may be taxed in that other State. The provision extends to movable property as well if it forms part of the business property of a permanent establishment.

However, the capital represented by ships and aircraft operated in international traffic by an enterprise of a Contracting State and all other elements of capital of a resident of a Contracting State are taxable only in that Contracting State.

Article 22: Elimination of Double Taxation

For Spain, double taxation will be avoided as follows. According to Spain laws regarding the credit for taxes paid outside Spain, within Spain's internal legislation:

Article 23: Miscellaneous Provisions

Where a Contracting State reduces the tax rate or exempts from tax an item of income, profit, or gain of a resident of the other Contracting State, and under the laws of that other State, the resident is taxed only on the portion of that income, profit, or gain that is remitted to or received in that State, then the reduction or exemption will apply only to the portion that is taxed in that other State.

No relief shall be available under this Convention if the main purpose, or one of the main purposes, of any person involved in the creation, assignment, or alienation of any shares, debt claims, assets, or other rights was to take advantage of this Convention.

Article 24: Non-Discrimination

Article 24 of the Convention primarily focuses on three areas, which can be summarised as follows:

• Entities governed by the laws of one Contracting State should not be subjected in another Contracting State to taxation or obligations more burdensome than those faced by similar entities in the latter Contracting State, especially concerning residency status.
• Taxation on a business's permanent establishment in a different Contracting State should not be less favourable than the taxation applied to local businesses engaging in comparable activities.
• Payments such as interest and royalties made by a business from one Contracting State to a resident of another Contracting State should be deductible under the same conditions as if they were made to a resident of the former Contracting State.

However, this principle doesn't mandate that the Contracting State extend to non-resident individuals the same tax benefits provided to residents unless they are nationals of the United Kingdom.

Article 25: Mutual Agreement Procedure

Article 25 of the Convention outlines the Mutual Convention Procedure (MAP) for resolving taxation disputes between the involved Contracting States. Unresolved cases are decided via arbitration between the competent authorities, provided that the cases are presented in time.

If a person believes they are facing taxation contrary to the Convention's provisions, they can present their case to either Contracting State's competent authority within three years of the taxation issue's notification. The competent authorities will endeavour to resolve the case mutually and, if unsuccessful, will seek resolution with the other Contracting State's authority. Any Convention reached supersedes domestic law time limits.

Article 26: Exchange of Information

The importance of exchanging the information by the competent authorities of two Contracting States (defined in Article 3) is addressed in Article 26 of the Double Taxation Convention. The relevant information will be exchanged to enforce the provisions of the Convention. The article also stresses that the information received by a Contracting State must be treated as secret, similar to domestic tax information.

If a Contracting State requests information, the other Contracting State cannot refuse to supply it and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the Contracting States are not obligated to do the following:

• Carry out administrative measures that violate the laws or administrative practices of either Contracting State.
• Supply information that is not obtainable under the laws or normal administrative practices of either Contracting State.
• Provide information that would reveal trade secrets or contravene public policy.

Article 27: Members of Diplomatic Missions and Consular Posts

The provisions in the Convention shall not affect the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special agreements.

Article 28: Entry into Force

It was agreed on the Convention that each of the Contracting States should notify the other in writing of the completion of procedures required by its law for bringing the Convention into force. The same is emphasised in Article 29, Termination. The Convention was given effect via the exchange of letters signed on 14th March 2013 and entered into force on 12th June 2014. Various taxes were affected in different dates:

Article 28: Termination

This Convention remains valid until terminated by either Contracting State. Termination requires written notice at least six months before the end of any calendar year, beginning after five years from the Convention's entry into force. Upon termination:

• Taxes withheld at source cease after the end of that calendar year.
• In respect of other taxes, the Convention shall cease for taxation years beginning after the end of that calendar year.
• For all other matters, after the end of that calendar year.

For both Contracting States.

Conclusion

The Double Taxation Convention (DTA) between the UK and Spain, effective from 12th June 2014, mitigates double taxation for residents and businesses in both countries. It defines the scope of taxes covered, including income, corporation, and capital gains taxes.

It sets guidelines for residency status, permanent establishments, and specific income sources such as dividends, interest, royalties, and capital gains. The DTA ensures non-discrimination, tax relief, and dispute resolution, promoting fair and predictable tax obligations. It also emphasises the exchange of information between tax authorities and maintains fiscal privileges for diplomatic missions, enhancing clarity and cooperation in tax matters between the UK and Spain.