The Spain-US Tax Treaty and the 2019 Protocol
The Convention for the Avoidance of Double Taxation between Spain and the United States was originally signed on February 22, 1990 and entered into force on November 21, 1990. Though comprehensive for its generation, the passage of time and the evolution of international tax law — particularly the OECD/G20 BEPS measures — left several of its articles obsolete.
The amending Protocol, signed on January 14, 2013 in Washington, did not enter into force until November 27, 2019 after completing the parliamentary ratification process in both countries. It was published in Spain’s Official State Gazette on November 28, 2019 (BOE-A-2019-15166). The changes apply to withholding taxes on income arising in taxable years beginning on or after January 1, 2020, and to other taxes for taxable years beginning on or after January 1 of the year following entry into force.
Key Changes Introduced by the 2019 Protocol
Dividends: Three Withholding Tiers
Art. 10 of the Treaty was amended to introduce three source-country withholding rates on dividends:
| Recipient’s ownership | Withholding rate |
|---|---|
| ≥80% of capital, held for ≥12 months, + satisfies LOB | 0% |
| ≥10% of capital, held for ≥12 months | 5% |
| All other cases | 15% |
The 0% tier is conditional on the recipient also satisfying the LOB clause, preventing zero-rate access through purely instrumental structures.
Interest: 0% as the General Rule
Art. 11 of the Treaty now exempts interest paid between Spain and the US from source-country withholding as a general rule. Excluded from the exemption are contingent interest (amounts that depend on the debtor’s profits or cash flows) and interest linked to participations that give the creditor rights equivalent to those of an equity holder. A 10% rate is maintained for those categories.
Royalties: 0% as the General Rule
Royalties — licensing fees, intellectual property rights payments — are also subject to 0% withholding as a general rule under the amended Art. 12. This is a material improvement over the previous 10% rate, which had made Spain-US royalty structures comparatively unattractive.
LOB Clause (Art. 17): Limitation on Benefits
The Protocol introduced a full LOB clause modeled on the US treaty practice of anti-treaty-shopping rules. To access treaty benefits, an entity resident in one of the States must satisfy at least one of the following qualification criteria:
- Listed company: the entity or its parent is listed on a recognized stock exchange in Spain or the US.
- Qualified ownership: at least 50% of the voting rights or shares are owned by residents of the contracting State for more than half of the taxable year.
- Active business entity: the entity conducts an active trade or business in its state of residence that generates at least 50% of its gross income.
- Derivative benefits test: the entity derives treaty benefits through owners who themselves satisfy the above criteria.
A discretionary relief provision also exists for entities that do not satisfy any objective criterion but can demonstrate that establishing and operating in the state of residence was not principally aimed at obtaining treaty benefits.
Transparent Entities (Art. 1.6): The Key for LLCs
The inclusion of Art. 1.6 in the Treaty is the most significant change for planning with LLC structures. It provides that when an entity treated as fiscally transparent in one contracting State (and not transparent in the other) earns income from the other State, treaty benefits are granted at the member level, not at the entity level.
The practical application for a US LLC (disregarded or partnership-taxed, not elected as a corporation) with a Spanish tax resident member is as follows: the Spanish member can invoke the Spain-US Treaty with respect to the income attributed through the LLC — their proportionate share of US-source income — as if they had received it directly. This matters for accessing the reduced treaty rates on dividends the LLC receives from US subsidiaries, on interest from accounts or loans, or on royalties.
At BMC we apply this clause in the analysis of every LLC structure before designing the income flow. Without it, the LLC can fall into a treaty gap: the Treaty does not cover it as an entity (it is not a resident for treaty purposes), and prior to the Protocol a Spanish member could not invoke it at all.
Effective Date and Timing
The Protocol has been in force since November 27, 2019 and applies to withholding taxes from January 1, 2020 onward. For taxpayers who structured Spain-US transactions between 2013 (Protocol signing) and 2019 (entry into force), the old rules applied throughout that period — a point that can be relevant in audits covering the standard four-year lookback window.
See also: Tax Treaty · Double Taxation · Tax Residence in Spain · Permanent Establishment