A new double tax treaty for Spain and the UK is coming into force. According to HM Revenue & Customs it “has substantial benefits for companies, pension schemes and individuals”. This article looks at the provisions affecting individuals.
A new double tax treaty for Spain and the UK is coming into force. According to HM Revenue & Customs it “has substantial benefits for companies, pension schemes and individuals”. This article looks at the provisions affecting individuals.
The new treaty was signed in London in March 2013 by the ambassador of Spain and the Secretary of the British Treasury, David Gauke. It replaces the existing treaty which dates back to 1975, and enters into force as follows:
- 12th June 2014 for the purposes of withholding taxes
- 1st January 2015 in Spain
- 1st April 2015 for companies in the UK
- 6th April 2015 for individuals in the UK.
Pensions
Under the current treaty, certain UK pension amounts are exempt from taxation in Spain. This concerns Government Service pensions (mainly fire service, police service, civil service, armed forces and local authority, but not NHS pensions).
This does not change with the new treaty, but the amount of pension received must now be included in the calculation which determines how much tax you owe. While the treaty gives a credit for the Spanish tax due on such income (so it is not directly taxed in Spain), this effectively means that your income which is directly taxable in Spain (e.g. other pension and rental income) may be pushed into higher rates of tax.
This affects your earned income allowance and marginal rate of tax, which will result in an increased tax bill in most cases.
The new treaty expressly provides that where income or capital is exempted from Spanish tax by way of treaty provisions, the income will still be included in the calculation to work out the rates of tax due.
Capital gains tax on sale of shares
Currently Spain has no taxing rights on gains realised by UK residents on the sale of shares in any Spanish company.
The new treaty reinstates Spanish taxing rights on any company whose asset base comprises of at least 50% of Spanish property. Thus where Spanish property is owned via a company, Spain is granted taxing rights on any sale of shares connected with the ownership of the property (along with the UK if held by a UK company).
Application of the treaty to trusts and partnerships
The new treaty brings the terms trusts and partnerships into the range of definitions. The term “person” includes an individual, a trust, a company, or other body of persons. Article 4.4 contains specific rules to determine when the treaty applies in structures involving UK resident trusts established in the UK or in third countries.
The new treaty allows both countries to look through the structure of trusts and partnerships, as though the trust does not exist and the income flows directly to the beneficiaries. As such these sources of income and gains can benefit from the treaty provisions, but any tax benefits created by utilising a trust structure are effectively lost as the trust is made transparent.
These provisions only apply to UK resident trusts. It does not apply to trusts established in European countries like Malta which do not have Spanish or UK assets within the trust.
Withholding tax
In cases regarding royalties, interest or dividends received from subsidiaries with a minimum stake holding of 10%, withholding tax is reduced to zero. In other cases withholding tax is set at a maximum of 15%. This applies from 14th June 2014 in both countries.
Anti-abuse
A new clause provides that treaty benefits will not be applicable to transactions which are entered into for the sole purpose of benefiting from a treaty provision.
Arbitration
Where an individual considers that he has been taxed in a way which is not in accordance with the convention, he has three years to present his case. A new arbitration clause is introduced for use in cases where the contracting states are unable to reach an agreement.
Double tax treaties supersede national law and therefore take precedence over either country’s domestic rules. This article only covers the changes to the treaty; there are obviously many other provisions that affect you. If you have moved from the UK to Spain, you need to understand how the double tax treaty applies to you, and how it works in relation to domestic laws. We always recommend you take advice from an expert knowledgeable on the treaty and both countries’ tax laws and how they interact, particularly when it comes to minimising taxation.
18 June 2014
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
