How do double taxation agreements work? The way that reduces the tax bill of companies

The treaties to avoid double taxation, such as the one signed between Spain and the United States that will enter into force on November 27, are agreements that seek to promote investments and economic relations between countries with a fairer treatment of taxation.

Here are some key questions about these types of deals.

-What is an agreement to avoid double taxation?

to avoid that the companies present in both -normally, with headquarters in one and businesses in the other- have to pay twice for the same taxable event.

For example, without an agreement of this type, it could be the case that a foreign subsidiary of a Spanish company would have to pay a withholding for paying a dividend in the country from which it operates and another in Spain when it is repatriated by the parent company.

They also usually include the guidelines for paying taxes, the communication channels between tax administrations and some bonuses.

These agreements operate bidirectionally for the two signatory countries, that is, they apply the same to a Spanish company with business in the other country as to a company from the other country with business in Spain.

-How many double taxation agreements has Spain signed?

According to the information available on the Tax Agency website, Spain currently has signed 103 double taxation agreements -95 in force and 8 in process- with countries on five continents, from powers such as the United States or Germany to Trinidad and Tobago, Uzbekistan or Barbados.

-What advantages do these agreements have for companies?

Experts point to legal certainty as advantages, because in this way the investor knows the return he will have and the taxes he will have to face.

In addition, it supposes an important saving in taxes, since it avoids duplications in the tax bill.

-Why is the agreement with the United States renewed?

To adapt to the new economic relationship between Spain and the United States, which is very different from the one in 1990, when the previous agreement was signed.

-What novelties does the renewed agreement bring?

It improves the tax treatment of dividends, royalties, interest, capital gains or property rights obtained by companies from one of the signatory countries in the other, while facilitating conflict resolution.

Specifically, the new agreement reduces taxes for the payment of dividends between both countries when the recipient has more than 10% of the capital of the person distributing and eliminates them when the percentage of control exceeds 80%.

It also abolishes the withholding tax on interest (now 10%) and royalties (now 5%, 8% or 10%), makes it easier to manage capital gains, and eliminates tax on intellectual property rights, among other issues.