• This article explains what double taxation is, when the same income may be taxed in two countries at once, and how this issue is usually resolved through international agreements.
• The key steps are to determine tax residency, check whether a tax treaty exists between the countries, choose the correct mechanism – exemption or tax credit – and keep the supporting documents.
• For Spanish tax residents, the usual mechanism is a credit for tax paid abroad, but the deduction is limited to the amount of Spanish tax due on that same income. Taxes paid in offshore jurisdictions are not deductible.

Contents

• What is double taxation?
• Double taxation agreements
• How a double taxation agreement is applied
• FAQ

We live in an era of globalization, where traditional state borders are becoming blurred and more and more people comfortably live, work, and invest in different countries at the same time. The globalization of personal and corporate finances has led to complex tax situations, with double taxation being one of the main concerns. The issue of tax payment and tax optimization has become a common challenge for those who receive income or carry out economic activity in more than one country.

In this article, we will look at what double taxation is, how it is regulated by international tax treaties, whether taxpayers really have to pay tax twice on the same income, and what measures can be taken to avoid it legally.

What is double taxation?

Double taxation arises when the same income, monetary receipts, or profit is taxed in two different tax jurisdictions. This often happens when an individual or company resides or is registered in one country but earns income in another. Such a situation may result in the payment of similar taxes in both countries on the same taxable basis.

Double taxation may affect various types of foreign-source income, including:

• Employment income received by workers who are temporarily or permanently employed abroad.
• Dividends paid by foreign companies to shareholders who are tax residents of Spain.
• Interest and royalties, including income from loans, copyrights, or intellectual property.
• Pensions, especially public pensions, which may be taxed both in the source country and in the country of residence.
• Capital gains, for example from the sale of real estate or financial assets outside the country.

Fortunately, most countries have bilateral double taxation agreements that usually make it possible to avoid being taxed twice. Under these agreements, in some cases the amount of tax paid in the country where the work is performed, that is, at source, is deducted from the tax due in the country of residence. In other cases, the income earned in the country of employment is taxed only there and is exempt in the country of residence. One of the mistakes that can be made when applying double taxation agreements is assuming that they all work in the same way. However, each agreement signed by Spain may provide its own mechanism for eliminating double taxation, so before making any tax decision it is essential to study the relevant article of the specific treaty.

It is also important to bear in mind that tax rates themselves may differ from country to country. For example, if the tax rate in the country of employment is higher, that higher rate will ultimately apply, even if the tax paid there is credited in the country of residence or if the country of residence exempts the taxpayer from additional tax. In other words, a credit may be available, but not a refund. To benefit from relief from double taxation, you will need to prove your tax residency and the fact that tax has been paid on the income received.

Double taxation agreements

The main purpose of double taxation agreements is to coordinate tax legislation so that the taxpayer does not have to pay tax twice on the same income. Such agreements determine which country has the right to tax certain types of income, such as salaries, dividends, interest, or capital gains, and provide mechanisms to eliminate or reduce the double tax burden. These mechanisms include:

• Exemption from taxation in one of the treaty countries.
• A tax credit for tax paid abroad.
• Limitations on withholding tax rates at source.

In most treaties, Spain uses the so-called tax credit method to eliminate double taxation. This means that a tax resident may deduct from Spanish tax the amount actually paid in another country. However, this deduction is limited: it cannot exceed the portion of Spanish tax that is proportionally attributable to the income earned abroad.

In certain cases, however, a different system is used – tax exemption with progressive adjustment of income. This applies, for example, under the treaty with the Netherlands. This rule means that income earned abroad is not taxed in Spain, but it is still taken into account when calculating the tax base and the amount of tax payable. In simple terms, the foreign income itself is not taxed in Spain, but it may push the taxpayer into a higher tax bracket on the rest of their income, since IRPF in Spain is calculated on a progressive scale.

You can find the list of countries with which Spain has signed double taxation agreements, as well as the official texts, on the website of the Spanish Tax Agency (AEAT). Thanks to these agreements, taxpayers may be exempt from certain taxes or may exercise their right to apply tax deductions in one of the treaty countries depending on the state of which they are a tax resident and the type of income received.

If a country is not on the list, it means that it has not signed a bilateral agreement with Spain. In that case, as well as where the income does not fall within the scope of an existing treaty, it may still be possible to rely on the relief for international double taxation provided by Spanish tax legislation. This allows the amount of tax due in the IRPF return or corporate income tax return to be reduced by the amount actually paid abroad on income earned outside Spain. However, the deduction is limited to the amount of tax that would have been payable in Spain on that same income. For example:

• A tax resident of Spain receiving dividends from a US company and having paid 15% withholding tax at source may take that amount into account in their Spanish tax return.
• A Spanish professional who provided services in the United Kingdom and paid tax there at source may apply the corresponding deduction when declaring that income in Spain.

How a double taxation agreement is applied

To avoid double taxation, a number of simple steps should be followed:

• Determine tax residency, that is, identify the country in which the taxpayer is a tax resident and where they are required to pay tax on worldwide income.
• Check whether a bilateral agreement exists.
• Apply the appropriate procedure: obtain an exemption or claim a tax credit.
• Keep all supporting documents, withholding certificates, and tax returns in order to avoid problems with the tax authorities.

In the case of an individual who is a tax resident of Spain, if tax has been paid abroad on dividends or profits, that amount may be taken into account as a deduction when filing the annual IRPF return. It does not matter whether the tax was paid under an international treaty or under the laws of another country; what matters is that the income must be included in the Spanish tax return. This deduction may also be applied even if the foreign tax was paid in a different tax period. However, there is one important limitation: the amount of the deduction cannot exceed the amount of tax that would have been charged in Spain on the same income, meaning that the result cannot be negative.

Taxes paid in countries or territories that do not exchange tax information, have opaque financial systems, or offer preferential tax regimes that facilitate tax avoidance or evasion, that is, offshore jurisdictions, are not deductible under any circumstances.

In any case, the deduction may not exceed the total amount of tax payable in Spain on the relevant income included in the tax base. The amount to be deducted must be entered in the corresponding box of the tax return. We strongly recommend seeking qualified assistance from a lawyer specializing in tax and international law or from a tax adviser when filing tax returns in Spain, especially when applying double taxation agreements.

This information does not constitute legal or tax advice. It is not a public offer.

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