Double Taxation

What Is Double Taxation?

Double taxation arises when the same income or asset is subject to comparable taxes in two different countries in the same tax period. It is an inevitable consequence of overlapping fiscal sovereignty: each state asserts taxing rights based on its own connecting factors (residence, source, permanent establishment), and when two states claim the same income on different grounds, the taxpayer faces taxation twice.

Types of Double Taxation

Juridical double taxation: the same taxpayer is taxed on the same income in two countries. This is the most common scenario in international practice: a Spanish resident receiving interest from a German bank may face a withholding tax in Germany and also include that interest in their IRPF taxable base in Spain. Double Tax Treaties are primarily designed to address this type of double taxation.

Economic double taxation: the same income is taxed at different levels of the same economic chain. The classic example is corporate profit: it is first taxed under Corporate Tax in the company generating it, then taxed again when distributed as a dividend to the individual shareholder, who includes it in the savings base of their IRPF. Here, two different taxpayers bear the burden on the same underlying income.

Spanish Law: Key Provisions

In Corporate Tax (Arts. 21-22 LIS)

Article 21 of Spain’s Corporate Tax Law (Law 27/2014) provides the participation exemption: dividends and capital gains from foreign subsidiaries are 95% exempt when the Spanish company holds at least 5% of the subsidiary’s capital, has held it continuously for at least one year, and the subsidiary is subject to an equivalent tax (not a tax haven). This provision largely prevents economic double taxation within multinational groups.

Article 22 LIS extends a similar exemption to income from foreign permanent establishments.

In Personal Income Tax (Arts. 80-91 LIRPF)

Articles 80-91 of Law 35/2006 (LIRPF) regulate the foreign tax credit for individual Spanish residents earning income abroad. The taxpayer may deduct from their IRPF liability the lesser of: (i) the effective foreign tax paid, or (ii) the Spanish IRPF that would apply to those earnings. This eliminates juridical double taxation for individuals while ensuring Spain retains the right to tax to its own rate level.

Double Tax Treaties (DTTs)

Spain has concluded over 90 DTTs in force, covering all EU member states, the main trading partners (US, China, Japan, Mexico, Brazil) and virtually the entire Latin American region.

Elimination Methods in DTTs

Exemption method: the residence country exempts income taxed at source:

• Full exemption — the income is excluded from the residence country’s tax base entirely.
• Exemption with progression — the income is excluded from the taxable base but is considered when determining the applicable rate on other income.

Credit (imputation) method: the residence country reduces its own tax by the amount paid abroad:

• Ordinary credit — limited to the tax Spain would charge on those earnings.
• Full credit — the foreign tax is fully deductible even if it exceeds the Spanish liability.
• Fictitious credit (tax sparing) — Spain allows a credit for a notional tax even if the source country granted an exemption, respecting the incentive policies of developing countries.

Practical Situations Where Double Taxation Arises

Common scenarios for Spanish companies and individuals include:

• Dividends received from foreign subsidiaries (both economic and juridical double taxation may apply simultaneously).
• Employment income earned abroad by seconded employees.
• Profits attributable to foreign permanent establishments.
• Interest and royalties paid between related parties across borders.
• Capital gains on the sale of foreign shareholdings or real property abroad.

BMC’s international tax team analyses each of these situations to identify the applicable treaty, the most favourable elimination method, and the correct interaction with Spanish domestic law.