Double taxation in Spain: main risks and solutions.

Understanding the Issue of Double Taxation in Spain

For many foreigners owning property in Spain or conducting business here, there is a risk of paying taxes in two jurisdictions simultaneously. Double taxation refers to a situation where an individual or legal entity pays tax on the same income or property in two countries. These circumstances can lead to additional costs, fines, and complications in financial planning. As a result, people face the following “pain points”:

• Risk of overpaying taxes and financial losses.
• Confusion about how tax residency is determined.
• Challenges in applying international agreements and national exemptions.

However, there are effective solutions that allow individuals to minimize or completely avoid double taxation if they understand the legal mechanisms and comply with tax requirements in a timely manner.

How to Determine Tax Residency

The first key to understanding the issue is knowing who is considered a tax resident in Spain. Spanish legislation specifies that an individual is considered a resident if:

• They spend more than 183 days in Spain during the year.
• They have a “center of vital interests” in Spain (family, main source of income).

For legal entities, the "effective" place of company management is important. Spanish residents must declare their worldwide income, while non-residents only pay taxes on income derived from activities within Spain.

The Role of International Agreements (DTT) in Spain

Spain has signed over 90 international double taxation avoidance agreements (DTT – Double Taxation Treaty) with various countries. These agreements are based on the principle of avoiding the simultaneous taxation of the same income. They regulate the taxation of:

• Business profits and permanent establishments.
• Income from employment or self-employment.
• Income from real estate, dividends, interest, and royalties.
• Capital gains from the sale of assets.
• Pensions, director's fees, income from artists, and athletes.

The agreements may set preferential tax rates and clear rules defining where the main tax is paid. Each specific case (e.g., receiving dividends from abroad or selling real estate in Spain by a non-resident) has its own features and requirements.

Spain – Russia: Suspension of Part of the Convention

In December 1998, Spain and Russia signed a Double Taxation Avoidance and Tax Evasion Prevention Convention regarding income and capital taxes. However, some articles of this Convention were suspended as of August 8, 2023. It is important to note that the main article allowing the tax paid in one jurisdiction to be credited in the other has not been suspended as of the time of writing. This means the mechanism for avoiding double taxation remains in effect, although preferential tax rates for certain types of income may no longer be available.

How to Avoid Double Taxation in Practice

In addition to the DTT, Spain has internal mechanisms that simplify the calculation of the tax base and reduce risks. The main solutions include:

• Determining Residency Status. A precise analysis of whether you are a tax resident of Spain (or another country) at the end of the year. This allows for accurate income declaration and the correct application of tax laws.
• Tax Credit. A Spanish resident can reduce their tax liability in Spain by the amount of tax already paid abroad. It is important to have supporting documents (residency certificate, tax statements).
• Exclusion of Income. In certain cases, for specific activities or when meeting the conditions of a DTT, some foreign income may be exempt from taxes in Spain.
• Professional Consultation. If the situation is complex, consult qualified tax experts familiar with international law and Spanish legislation.

Taxes on Different Types of Income in Spain

According to Spanish law, there are different categories of income, each subject to different tax rates. Below are the main options.

IRPF (Impuesto sobre la Renta de las Personas Físicas) – Personal Income Tax

For Spanish resident individuals, the tax rate is progressive and depends on total annual income. Non-residents pay tax at a flat rate, typically 19% or 24%, depending on the type of income and taxpayer status.

IS (Impuesto sobre Sociedades) – Corporate Tax

For resident companies, the rate is typically 25%, though there are special regimes and reduced rates in some cases. Non-resident companies conducting business in Spain through a permanent establishment are taxed only on profits related to that establishment.

IP (Impuesto sobre el Patrimonio) – Wealth Tax

In Spain, a wealth tax may apply if the value of assets owned by a resident exceeds a certain threshold set by law. Non-residents are only taxed on assets located in Spain.

Particularities of Taxation on Real Estate Income

Income from renting or selling real estate in Spain may be subject to tax in Spain, even if the owner is a non-resident. It is important to consider:

• The rate of IRPF (Personal Income Tax) if you are an individual.
• The corporate tax rate (IS) if the property is owned by a company.
• Additional municipal taxes (e.g., tax on the increase in value of urban land).

Recommendations for Reducing Tax Risks

To properly plan taxes in Spain and avoid overpaying, it is important to:

• Timely determine tax residency and change it only if it is financially and legally justified.
• Check whether a DTT exists between Spain and your country, and use any available exemptions or tax rates when necessary.
• Collect all supporting documents for income and taxes paid abroad.
• Stay updated on changes in legislation, especially suspensions or modifications of specific DTT articles.
• Consult with lawyers and tax consultants familiar with international law and the specifics of Spanish taxation.

Conclusion: Proper Planning is the Key to Savings

Double taxation in Spain is not an inevitable problem if you know and apply the available mechanisms: international agreements, tax credit schemes, and Spanish domestic exemptions. Despite the complexity of some rules, the Double Taxation Avoidance Convention and Spain's national legislation provide ample opportunities to minimize unnecessary costs. To avoid mistakes, it is important to study current changes, confirm residency in time, and consult with experts. Only then can you optimize taxes, ensure transparency in your financial operations, and secure long-term stability.