SPANISH TAX AUTHORITIES NOTE RELATED TO THE APPLICATION OF THE DEDUCTION TO AVOID INTERNATIONAL DOUBLE TAXATION
On 4th March 2021, a note was published on the website of the Spanish Tax Agency (hereinafter “STA”) in order to clarify different issues relating to the application of the deduction to avoid international double taxation.
As is well known, article 31 of the Corporate Income Tax (hereinafter “CIT”), is the positive law rule in charge of regulating the matter to be dealt with.
In general terms, the rule establishes that when the taxable income of the taxpayer includes positive income obtained and taxed abroad, which has not been obtained through a permanent establishment (hereinafter PE), the lower of these two amounts will be deducted from the taxpayer’s gross tax payable:
- The effective amount of the amount paid abroad by reason of taxation of an identical or analogous nature to corporation tax.
- The amount of the gross tax payable in Spain if the income had been obtained in Spanish territory.
However, the note summarises certain interpretative criteria in relation to the correct application of the double taxation deduction and its requirements that are generating some conflict in practice. The points addressed in the note are as follows:
1. Necessity of accreditation of the effective payment of the withholding tax in the other State
This point clarifies that the taxpayer is the responsible for justifying the effective payment in the source State, using the means of proof that it deems appropriate.
In this sense, it would have been interesting if the note had mentioned some examples of acceptable proof by the Tax Authorities.
2. The withholding required in the other State must be that which derives from the Tax treaty signed with that State
On this point, the STA clarifies that only the withholding in the source State that is legally applicable according to the tax treaty signed with that State can be deducted.
In many cases, the State where the income is obtained withholds more than the amount provided in the tax treaty. In these cases, the taxpayer may deduct, at most, up to the limit agreed in the tax treaty, and the excess must be claimed in the State where the transaction took place, but it will never be deductible for Spanish corporate income tax purposes.
Therefore, the following points should be considered:
- The taxpayer should justify the nature of the income obtained abroad. If an income is classified under the tax treaty as a business profit, the Spanish Tax Authorities will not accept the withholding in any case.
This classification is often not easy. The STA states in its note that in order to correctly classify the income, the provisions of the OECD Model Convention (the comments) should be taken into account.
By way of example, the note mentions the Resolution of the Central Economic Administrative Tribunal (“TEAC” for the Spanish acronym) of 21/03/2013, which denies the double taxation deduction as there is no withholding tax in the source State, according to the provisions of the tax treaty and the classification of the income.
2. The withholding rate applied is the one stated in the corresponding tax treaty. For this purpose, both the article corresponding to the nature of the income and the Protocol (at the end of the tax treaty) should be reviewed to determine whether there is any provision that reduces the withholding rate to be applied, eliminates it or whether it contains the most-favored-nation clause.
3. Application of the deduction limit
The STA explains in this point that in order to calculate the gross tax payable in Spain, the net income obtained in the other State must be taken into account. For this purpose, the total expenses (associated with the income) must be subtracted from the gross income, both direct and indirect expenses, and both those generated in Spain and those generated in the source State. In addition, the reduction of income from the transfer of intangible assets must also be considered for the calculation of the gross tax liability.
4. Input tax paid in the other State is not a deductible expense for the determination of the tax base
In this respect, the STA establishes that when the tax borne abroad has been recorded as an expense, a positive adjustment must be made for the same amount, although it is not considered deductible for Spanish Corporate Income Tax purposes.
From 2015 onwards, article 31.2 of the CIT does allow the taxpayer to deduct the part of the tax paid abroad that is not deductible in the tax liability, only if it is related to economic activities carried out abroad.
The input tax that does not correspond to the provisions of the tax treaty will not be considered either as an expense in the tax base or as a deduction in the tax liability.
In general terms, the note stresses that the burden of proof fall on the taxpayer, in order to justify the nature of the income obtained in another State, as well as the economic activities carried out abroad (in order to be able to apply the deduction in the gross tax liability).