If Alfredo, who is a resident of Spain, is taxed on his dividends earned in Canada by both Spain and Canada (as Spain requires worldwide income to be declared and Canada has a non-resident income tax), this would be considered a case of international double taxation. In this post, we will explain what international double taxation is, which double taxation agreements Spain has signed, and what methods can be used to avoid being taxed twice for the same taxable event.
Taxation in Spain
Index of contents
According to a report on tax competitiveness carried out by the Institute of Economic Studies, Spain ranks 34th out of the 38 countries analyzed in terms of taxation. Taxation in Spain is higher than that of our neighboring countries, as it amounted to 42% of GDP in 2022 (while the EU average is 41.7%). Additionally, it is projected that taxation in Spain will increase in 2023 to 42.3% due to the regulation of new taxes and the reform of existing ones.
When it comes to taxation, we should also consider international double taxation and the instruments used to prevent it, such as international double taxation agreements signed by the states.
What is international double taxation?
International double taxation occurs when two or more States levy identical or similar taxes on the same taxable event and on the same taxable person in the same period of time. Therefore, there is an identity of subject, fact and time period.
What types of international double taxation exist?
International double taxation can be of two types:
- Legal. This occurs when the same person and the same income are taxed by two different states within the same tax period. This double taxation usually occurs because a person is considered legally resident in two different states.
- Economic. This occurs when the same income is taxed by two different states during the same tax period, but by two different taxpayers. For example, it occurs when dividends are obtained from a company, for which the company is taxed by the IS and the partner by the IRPF.
How do international double taxation treaties work?
There are different methods used in double taxation treaties to prevent the same event from being taxed in two different States:
Under this method, for example, Spain (as the country of residence) exempts income that has already been taxed in other countries. There are two modalities:
Simple exemption: Under this modality, the income is not taken into account when calculating the taxpayer’s taxable base.
Progression exemption: Under this modality, the income is taken into account when calculating the taxpayer’s taxable base.
Imputation or deduction method
In this case, the taxpayer’s total income is taken into account, including worldwide income, and the income earned abroad is deducted.
Double Taxation Agreements to avoid taxing twice the same event
International double taxation can have negative impacts on the internationalization of companies and the mobility of workers across different countries. To mitigate this, double taxation agreements are established to regulate the mechanisms to be applied if an income is taxed in both countries. The agreements aim to eliminate or reduce taxation in one of the countries to avoid international double taxation.
Spain’s double taxation treaties with other countries
There are currently 102 double taxation agreements signed by Spain, of which 93 are in force and another 5 are being processed (Bahrain, Montenegro, Namibia, Peru and Syria). In addition, agreements have been renegotiated with Austria, Belgium, Canada, China, Finland, India, Japan, Mexico, the United Kingdom and Romania.
The following countries have signed double taxation treaties with Spain:
- Bosnia and Herzegovina
- Costa Rica
- Czech Republic
- El Salvador
- New Zealand
- Russian Federation
- South Africa
- South Korea
- Spain (treaties with its autonomous regions)
- Trinidad and Tobago
- United Arab Emirates
- United Kingdom
- United States
To check if a certain country has a double taxation agreement with Spain, you can visit the website of the Ministry of Hacienda and search for the specific country.
If you are a resident of Spain and receive income from other countries, it is advisable to consult a specialized tax consultancy in international double taxation to determine whether there is an agreement in place that allows you to avoid being taxed twice for the same income.