Partners in professional civil societies may deduct withholdings paid in Panama

Managing international taxation in professional civil societies requires a clear distinction between the entity's expenses and the partner's tax credit. A recent binding ruling from the Dirección General de Tributos (DGT) addresses the possibility of applying the deduction for international double taxation on withholdings applied in Panama for architectural services.

What the DGT has ruled

The inquiry focuses on a professional civil society operating under the income attribution regime that provides services in Panama. Since the activity is carried out in said country, the Convention between Spain and Panama applies, specifically Article 14, which limits the withholding to 7.5% of the gross amount.

The DGT's criteria establish that, due to the nature of the professional civil society, the withholdings do not constitute an additional expense for the entity, but rather act as a tax credit for the partners. Therefore, the deduction to avoid international double taxation must be applied in the personal tax return of each partner, in the same proportion in which the corresponding income is attributed to them.

What this means for you

If you are a partner in a professional civil society that provides services in jurisdictions with which Spain has double taxation treaties, such as Panama, you should take the following into account:

• Nature of the tax: The withholding suffered abroad is not a deductible expense of the society's activity, but a tax paid that allows for the avoidance of double taxation.
• Application in IRPF: The opportunity to mitigate the tax burden lies in the individual tax return of each partner and not in the society's accounting.
• Treaty limits: The deduction is subject to the limits established in the Convention to avoid double taxation, which in this case limits the withholding to 7.5%.

What should be done

It is necessary to ensure that the attribution of income and the corresponding application of withholdings incurred abroad are correctly reflected in each partner's IRPF tax return. Since the application of these criteria depends on the legal structure of the entity and the applicable treaty, it is recommended to assess each particular situation to ensure that the deduction is applied in accordance with current regulations.