Double Taxation Agreement between Spain and the Netherlands

Double Taxation Agreement between Spain and the Netherlands

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In the Costa del Sol there is an important colony of Dutch nationals who have chosen our country as their permanent residence. The good climate and the friendliness of the population are important attractions that they have taken into account to settle in our country.

 

Once a “foreigner” becomes a tax resident in our country (by residing for more than 183 days a year), he/she must comply with his/her tax obligations, which are exactly the same as those that a Spanish national must comply with. However, when this “tax resident in Spain” obtains income from another foreign country, he/she must take into consideration the provisions of the Double Taxation Agreement that Spain has signed with the country of the source of the income, in order to avoid double taxation situations, given that sometimes this income must be taxed in the country from which it originates.

Today we would like to talk a little about the Double Taxation Agreement signed between Spain and the Netherlands.

 

As mentioned above, in order to find out how a tax resident (individual) should be taxed in Spain on income from the Netherlands, we must refer not only to the provisions of Spanish tax legislation but also to the provisions of the Double Taxation Agreement signed between the two countries.

 

We will proceed to a brief summary of the most common types of income that could be obtained by a Spanish tax resident whose source of origin is the Netherlands, and how they should be taxed.

 

1. Lease of real estate located in the Netherlands (article 6 of the DTC)

Article 6 of the IDC provides that income from immovable property can be taxed in the Country in which the property is located. In other words, the income that a tax resident in Spain obtains from renting a property located in the Netherlands could be taxed in the Netherlands.

 

Note: The fact that the DTC establishes that this income could be subject to taxation in the Netherlands does not mean that it must necessarily be taxed in the Netherlands, as it may be considered “exempt” in that country or it may be treated differently than in Spain, but the simple fact that the agreement states “may be subject to taxation in the Netherlands” means that it will be exempt from taxation in Spain.

 

Article 25.3 of the DTA establishes that this type of income would be subject to Spanish income tax, but would be “exempt”. In other words, you will not have to pay tax in Spain (IRPF) on the income you have obtained from the rental of the property located in the Netherlands, but this income (exempt income) will have to be taken into account for the purpose of calculating the tax rate at which that resident person will have to pay IRPF on other types of income that he/she may receive (increase the marginal tax rate applicable to other income).

 

  • Example:

Let us imagine that a tax resident in Spain has obtained rental income from a property located in the Netherlands in the amount of €100,000 per year, and has paid tax in the Netherlands on that rental in the amount of €2,500. Let us assume that this person has obtained an annual income in Spain as a “professional – lawyer” in the amount of €20,000 per year, with €3,000 withheld from his salary.

 

If that person had not had any rental income, the applicable personal income tax rate for his professional income in Spain would be around 21%, but given that he must compute the rental income obtained in the sum of €100,000, the tax rate applicable to that income as a “professional” would be around 45% (the marginal tax scale increases as the income to be computed for its calculation is higher).

 

2. Imputation of real estate income from real estate located in the Netherlands (Article 6 DTC)

Article 6 of the Double Taxation Convention between Spain and the Netherlands provides that income from real estate can be taxed in the Country where the property is located. In other words, the “presumed” real estate income that a tax resident in Spain can obtain from the ownership of a property located in the Netherlands could be subject to taxation in the Netherlands.

 

This situation is similar to the one described in section 1. An individual resident in Spain who owns a property in the Netherlands does not have to declare the presumed income attributable to his or her personal income tax return.

 

Given that a property located in the Netherlands does not have a cadastral value (given that this is a concept applicable and defined by Spanish regulations), the imputation of real estate income to be taken into account for the purposes of increasing the marginal rate applicable in the Spanish personal income tax return, we understand that by application of the provisions of article 85 LIRPF, would be calculated using this formula (1.1% x 50% acquisition price of the property).

 

This imputed income, according to the Double Taxation Agreement between Spain and the Netherlands, will be exempt from paying tax in Spain, but will be taken into account for the purposes of calculating the applicable marginal rate of personal income tax in the event that the taxpayer has to declare other types of non-exempt income.

 

The example would be similar to that given in the case of renting.

 

3. Dividends obtained from a company located in the Netherlands (article 10 of the Double Taxation Agreement between Spain and the Netherlands)

Those dividends obtained by the tax resident in Spain from a company located in the Netherlands will be taxed in Spain, and also in the Netherlands (at the maximum rate of 15%). However, a double taxation deduction may be applied in Spain when filing the personal income tax return, i.e. the amount paid in the Netherlands may be deducted.

 

4. Interest (Article 11 DTC)

Similar to point 3 (dividends) with the particularity that the maximum rate of taxation in the Netherlands should be 10%.

 

Double Taxation Agreement between Spain and the Netherlands

 

5. Sale of real estate in the Netherlands – capital gain (article 14 DTC)

Article 14 of the Double Taxation Convention between Spain and the Netherlands provides that gains derived from the disposal of real estate can be taxed in the Country where the real estate is located. In other words, the profit obtained by a tax resident in Spain from the sale of a property in the Netherlands could be subject to taxation in the Netherlands.

 

Article 25.3 of the DTC establishes that this type of income or gain is exempt from taxation in Spain, but it must be computed for the purposes of calculating the tax rate at which that resident person must pay personal income tax on other types of income of the same category (capital gains).

 

Note: The fact that the DTA establishes that this profit could be taxed in the Netherlands does not mean that it must necessarily be taxed in the Netherlands, as it is possible that in that country it could be considered “exempt” or have a different tax treatment to that which it could have in Spain. If, for whatever reason, the capital gain is not taxed in the Netherlands, it will continue to be “exempt” from taxation in Spain.

6. Sale of shares or participations (article 14 CDI)

The capital gain obtained on the sale of shares or participations in a Dutch company will be taxed in Spain.

 

According to article 25.2 CDI, in the event that this gain is also subject to taxation in the Netherlands, according to its domestic legislation, the taxpayer may deduct in the tax return to be filed in the Netherlands, the tax that would be payable in Spain on this capital gain.

 

7. Retirement pension (articles 19 and 20 Double Taxation Agreement between Spain and the Netherlands)

If a resident in Spain receives a pension from the Netherlands, a distinction must be made:

 

  • Pensions received for retirement (non-public workers) are only taxed in Spain.

 

  • Pensions paid directly by the Dutch State, as a result of having been a civil servant, could in certain cases be taxed in the Netherlands, and would be exempt in Spain. In any case, it is necessary to request a certificate from the Dutch administration, which certifies whether the pension is exempt from taxation in the Netherlands.

 

 Netlex advisors in Marbella encourage you to contact our professional advisors if you have any doubts or questions regarding the Double Taxation Agreement between Spain and the Netherlands.

 

SOURCE OF INFORMATION:

  • Double taxation agreement between Spain and the Netherlands.
  • Tax consultation DGT V1595-14
  • Tax consultation DGT V1993-16
Double Taxation Agreement

Application of Double Taxation Agreement

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A Double Taxation Agreement (DTA) is a bilateral international treaty signed between two States, whereby they determine the way in which the income obtained in the second signatory country by the citizens of the first country is subject to the tax system of the second country and vice versa, i.e. how the income obtained in the first signatory country by the citizens of the second country is subject to taxation in the tax system of the first signatory country.

 

Not all countries have signed DTAs (although most of them have), which can generate a significant disadvantage for taxpayers residing in one country who obtain income from another country with which they have not signed a DTA, given that in such cases the income could be subject to taxation in both countries.

 

Based on the assumption that a tax resident in a given country must report in his personal income tax return all the income he has received during the year, including income from other countries on which he may have had to pay tax abroad, the DTA is the legal instrument that makes it possible to regulate the mechanisms to prevent the same source of income from being taxed twice.

 

In any Double Taxation Agreement we can distinguish:

  1. A definition of the concept of tax resident in a country.
  2. An explanation of the income that will be subject to the agreement.
  3. A specification of the country where the income is to be taxed. In DTAs, it is possible that the same income may be subject to taxation in both countries.

 

A mechanism to correct double taxation, so that the same source of income is not taxed in both countries (double taxation method).

 

We must start from the fact that a “Spanish” taxpayer must report in his personal income tax return all the income he has obtained worldwide, whether or not he has paid tax abroad, and that all Double Taxation Conventions are not the same.

 

Double Taxation Agreement

 

In general terms, and depending on the configuration of the DTA, double taxation can be corrected in two ways:

  1. By declaring the foreign source of income as income in the personal income tax return, and once the calculation of the tax payable has been made, deduct the tax payment made abroad.
  2. Declaring the source of foreign income as income in the personal income tax return (for information purposes) but not paying tax on this income because it is considered to be “exempt’‘ from taxation, although it counts for other purposes.

 

In our professional experience we have been able to observe that there is the possibility of an income not being taxed in either of the 2 countries (country of residence of the taxpayer, and country of origin of the income), when the applicable mechanism to avoid double taxation is to declare an income exempt, a circumstance that we are going to explain with the following example:

 

 Article 25.3 of a Double Taxation Agreement signed by Spain with a European Union country that we will call “country x” states:

When a resident in Spain obtains income or possesses assets which, in accordance with the provisions of this Agreement, may be subject to taxation in country x, Spain, except for the provisions of number 4, will exempt this income or assets from tax, but in order to calculate the tax corresponding to the remaining income or assets of this resident it may apply the same tax rate that would apply if the aforementioned income or assets had not been exempted.

 

 

In a “country x” its tax law states that both residents and non-residents are not taxed on capital gains from the sale of real estate, even though we are talking about a type of income that could have been taxable in that country, as it is in most European countries.

 

This means that if a tax resident in Spain sells a real estate property located in country x, having obtained a capital gain, this profit will not be taxed in that country because its internal tax regulations so provide, and neither will it pay tax in Spain according to the provisions of article 25.3 of the Double Taxation Agreement. (Binding Tax Query)

 

From Netlex advisors in Marbella, our recommendation, when applying a Double Taxation Agreement, is to carefully analyse the article referring to the method for eliminating double taxation, and in case of any doubt, consult an expert tax advisor who can clarify any doubts you may have.