The double taxation agreement: avoiding double payment

In such a globalised world, it is the order of the day that a person has the opportunity to work and therefore obtain income from two different countries, either by moving residence or on a one-off basis. In order to solve the problems arising from this, the Double Taxation agreement was created, which we will explain in detail below.

Definition of the double taxation treaty

The double taxation agreement is the signing of an agreement between two countries (in our case, Spain and a third country) to avoid the foreign person resident in Spain having to pay tax on that income in both countries.

The main objective of the double taxation agreement is, therefore, to promote foreign investment by giving security to investors and reducing the taxation that must be paid on it. Thus, it increases the possibility for business to be carried out directly in this country.

This means that, for example, if a foreigner obtains income from another country while residing in Spain, he or she would have to pay for it both in the country where he or she obtained it and in Spain. However, the double taxation agreement avoids this situation.

How to apply the double taxation convention

Spain has signed double taxation agreements with almost 100 countries, so in order to do so, you should consult each agreement to find out the conditions, requirements and bureaucratic process.

However, we can differentiate two different sources to make use of the Double Taxation convention. These are:

– Exemption: in this way, Spain is notified that the tax payment has been made in the issuing country and that it is therefore an external income to the country. In this case, no tax payment is made in Spain for this income.

– Tax credits VS taxes: the other method of making use of the double taxation agreement is usually to make the difference between the tax payments that have been made abroad for this income and subtract it from what is payable in Spain. Therefore, it is paid in both countries but not double.

Income that affects the double taxation convention

The reality is that although there is a double taxation agreement, not all income generated or obtained is eligible for application.

The common types of income to which the DTAA applies are foreign-source and capital income, corporate income tax and income of non-residents.

However, one tax that is not usually included in virtually all double taxation treaties is inheritance tax, as each country normally has different legislation as to the amount and person liable for the derived tax charge.

Countries that have a double taxation convention with Spain

The countries that have a double taxation agreement with Spain are updated and extended, so it is best to consult the Tax Agency’s website to find out the conditions for each one.

If you are a foreign resident in Spain or are thinking of doing so, you can take advantage of all the benefits of the Golden Visa. In addition, we will take care of all the necessary formalities and processes, such as the application of the double taxation agreement.