What you need to know about international tax rules when moving to Spain?
Double tax treaties are an essential part of international tax planning, especially for individuals and companies.
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Double Tax Treaties in Spain
Double tax treaties are an essential part of international tax planning, especially for individuals and companies with income, assets or economic interests in more than one country.
In Spain, double tax treaties are particularly relevant for expatriates, foreign property owners, retirees and international companies operating across borders.
They help determine where a person or company is considered tax resident and which country has the right to tax certain types of income or assets.
What Is a Double Tax Treaty?
A double tax treaty is an agreement between two countries designed to prevent the same income or asset from being taxed twice.
These treaties establish rules to determine:
where a person is tax resident;
which country has the right to tax specific income;
how taxation is shared between countries;
and whether taxes paid in one country can be deducted or credited in another.
Spain has double tax treaties with many countries, including Germany, the United Kingdom, France and several others.
Although each treaty has its own specific wording, most double tax treaties follow similar principles.
Why Are Double Tax Treaties Important?
Double tax treaties become relevant when a person has connections with more than one country.
This may happen, for example, when someone:
owns a holiday home in Spain;
spends part of the year in Spain;
receives income from another country;
moves their tax residence to Spain;
rents out Spanish property;
or operates a business in Spain through a foreign company.
Without a double tax treaty, two countries could potentially claim the right to tax the same person or the same income.
Tax Residence and the 183-Day Rule
One of the first issues to determine is where a person is tax resident.
For example, if a German client buys a property in Mallorca, it may initially appear that they remain tax resident in Germany and simply own a holiday home in Spain.
However, this can become more complex if the person spends significant time in Spain.
Under Spanish domestic law, a person may be considered Spanish tax resident if:
they spend more than 183 days in Spain during the calendar year;
their spouse or dependent family members live in Spain;
or their main economic or vital interests are located in Spain.
Therefore, anyone buying a holiday home in Spain should be careful not to unintentionally become Spanish tax resident.
The Risk of Dual Tax Residence
A person may sometimes be considered tax resident in two countries at the same time.
For example, Spain may consider a person tax resident because they spend more than 183 days in Spain, while Germany may also consider them resident because their main economic interests remain in Germany.
This is where the double tax treaty becomes essential.
The treaty contains rules to determine which country should be treated as the person’s tax residence for treaty purposes.
In many cases, presenting a tax residence certificate from the other country may help challenge or override the Spanish assumption of tax residence, provided that Spain has a double tax treaty with that country.
Spanish Property and Rental Income
Double tax treaties are also very important when it comes to income generated from real estate.
As a general rule, rental income from a property may be taxed in the country where the property is located.
For example, if a German tax resident owns a holiday home in Mallorca and rents it out, the rental income generated from that Spanish property will be taxable in Spain.
This principle generally applies regardless of whether the owner is tax resident in Germany, the United Kingdom, France or another country.
In other words, income arising from Spanish real estate is normally subject to taxation in Spain.
Property Ownership Through Companies
In the past, many foreign investors used companies to acquire and hold properties in Spain.
However, Spain has tightened its rules through new and amended double tax treaties.
Under many modern treaties, the sale of shares in a company may be taxable in Spain if more than 50% of the company’s assets consist of Spanish real estate.
This means that if a foreign company mainly owns Spanish property, the sale of the company’s shares may still trigger taxation in Spain.
This rule is designed to prevent investors from avoiding Spanish tax by selling company shares instead of directly selling the property.
Capital Gains, Foreign Income and Business Structures
Double tax treaties are also relevant when dealing with capital gains, foreign income and international business structures.
As a general rule, capital gains from movable assets are taxed in the country where the seller is tax resident. However, exceptions may apply, particularly when the assets sold are shares in companies whose value mainly derives from real estate located in another country. In such cases, Spain may have the right to tax the gain if the underlying assets are Spanish properties.
When a foreign individual moves to Spain, the applicable double tax treaty will determine how income from the former country of residence is taxed. This may include pensions, rental income, dividends, interest, capital gains or business income.
Private pensions are often taxable in Spain once the individual becomes Spanish tax resident, although public-sector pensions may remain taxable in the country that pays them, depending on the treaty.
Dividends may be taxed in both countries, although any withholding tax paid abroad can usually be credited against the Spanish tax liability. Interest income, on the other hand, is often taxable only in the country of residence, although this depends on the specific treaty.
Double tax treaties are also important for companies operating internationally. A foreign company doing business in Spain may choose between a permanent establishment or a Spanish subsidiary, each with different tax consequences.
In the European Union, EU directives may also apply, such as the Parent-Subsidiary Directive, which can allow dividends between EU group companies to be paid without withholding tax when the relevant conditions are met.
Conclusion
Double tax treaties are essential for individuals and companies with connections to Spain and another country.
They help determine tax residence, allocate taxing rights and prevent the same income from being taxed twice.
Because their application depends on the type of income, the location of assets, the residence of the parties and the relevant domestic laws, specialised legal and tax advice is highly recommended before moving to Spain, investing in Spanish property or structuring international business activities.
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