What is a double tax treaty

A Double Taxation Agreement (double tax treaty) is an accord concluded between one country and another (a treaty partner) that serves to relieve double taxation of income that is earned in one jurisdiction by a resident or business of the other jurisdiction.

It came to address the cross-border tax problems facing individuals and business operating within the International Markets; Spain have now established Double Tax Treaties/Agreements with many countries and therefore this has an important effect on the fiscal obligations of these operators.

As a general rule, the DTA´s specify which country has taxing rights over an individual or business, and, if they both have such rights, which one takes priority.

The agreements usually set down different rules for different types of income. They may also agree to exempt some income or gains from tax or allow a set-off of tax paid in one country against tax due in the other.

Before Double Tax Agreements emerged, any individual or business could be taxed on their foreign income by his home country and also by the country where the income came from.

If such situation arises today, you can usually claim tax relief and get some or all of this tax back. They may still get relief, or tax credit, even if there isn’t a Double Taxation Agreement, unless the foreign tax doesn’t correspond to your country´s Income Tax or Capital Gains Tax.

For Example: Spanish individuals and business that have paid tax at 15% on their foreign income in the country in which the income arises, may still have to pay tax in Spain. If the Spanish tax rate is 20%, they would only have to pay 5% of tax in Spain, as they could claim relief for the 15% of tax paid abroad.

Generally, state pension income from abroad is treated the same way under most agreements, so when a foreigner becomes a tax resident of Spain it becomes declarable and taxable in Spain but, in some cases, with a deduction for tax paid in their home country.

Private pensions may well have tax deducted at source. In this case it is still declared gross in Spain (as if no tax had been deducted) but with the benefit that the tax deducted at source may be deducted from Spanish tax liability.

However, the success of any tax claim still depend very much on the country´s Double Tax Agreement with the country the income´s from, and therefore it is always recommendable to get professional advice on all tax matters before settling down or starting a business in any foreign country.