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V0337-17 7 February 2017 · SG de Fiscalidad Internacional Criterion in force
IRNR · condonación de deuda

No retention of IRNR on debt forgiveness to a US entity under the treaty

A Spanish company proposes forgiving debt (principal and interest) to a US subsidiary. Tax authorities determine the forgiveness constitutes a Spanish source capital gain, but under the US-Spain double taxation treaty, the taxing power lies exclusively with the US. Thus, the Spanish company is not required to withhold.

The question raised

Question raised: Tax implications in Spain for non-resident entities (both the US entity and the Japanese parent company) as a consequence of the debt forgiveness by the Spanish applicant. In particular, the obligation to perform withholding for IRNR.

The DGT's ruling

The forgiveness of debt is classified as a capital gain which, being linked to a loan, must be treated as business profit under Article 7 of the Convention between Spain and the USA. As the taxing power belongs exclusively to the State of residence (USA), the income is exempt in Spain according to the convention. Therefore, the Spanish entity is not obliged to perform withholding or payment on account for IRNR.

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