Overview of the Non Residents Income (and Capital Gains) Tax in Spain

Incomes and capital gains of non residents –individuals and corporate bodies- in spanish territory are subject to Impuesto de la Renta de No residents (IRNR); lets have a look, from the corporate side, to this tax.

As usual, the first test regarding the IRNR law is whether the non resident corporate body has a permanent establishment in Spain, and the criteria is similar to those in OECD conventions, a fixed place of business, that may be a place of management, a branch, a factory, an office, a point of sale or distribution, a workshop, a mine, a quarry, a durable installation or construction, or an agent with powers to bind the foreign company.

If the activities are carried out by means of a permanent establishment (PE) in Spain, the tax base of the PE is calculated in accordance with the provisions on the general system of the Corporate Taxation Act (currently, 30% general rate, 25% for small companies) and the system of offsetting negative tax bases is applicable (fifteen years) with the following special features,

a) Application of the arm´s length regulations for the operations carried out by the PE with it head office or with another PE of the same head office,

b)In general, the payments made by the PE to the head office for royalties, interest, commissions, technical services and the use or transfer of goods or rights are not deductible and

c) Part of the general and management expenses attributed to the PE by the head office is deductible, provided these expenses are reflected in the PE's accounting statements and are attributed continually and rationally

In addition, when PEs of non-resident organizations transfer income abroad, a complementary tax (withholding) of 18% is charged on the amounts transferred.

This tax is not applicable to those PEs whose head office has its tax residence in another EU Member State or a country that has signed an agreement with Spain in which another system is not expressly established.

If there is not permanent establishment in Spain, we have three cases, a) international purchases and sales of merchandise, including auxiliary expenses and mediation royalties, that are not deemed to take place in Spain, thus not subject to IRNR, b) 

Income deriving from economic activities carried out in Spain (except for income deriving from the installation or assembly of machinery or equipment supplied from abroad, when the installation or assembly operations are performed by the supplier and the corresponding amount does not exceed 20% of the purchase price) are subject to IRNR, and c)

Income from services rendered to support economic activities carried out in Spain, are subject to IRNR. That is the case of a british company being paid a commision for sale from a resident company, sale corresponding to activities carried out in Spain.

In the absence of EP, the tax base is calculated based on the difference between the gross income and Staff costs, Cost of supplies and Utilities (any other expenses are not deductible). A general rate of 24% (withholding tax) is applicable to the resulting tax base. When a double tax treaty with Spain exists, the non resident corporate body may avoid the withholding tax by passing a certificate of residence issued by its revenue authorities.

Income of managers and members of boards of directors (or other bodies that perform the same function) and representative bodies, are subject to IRNR, when paid by a resident body corporate, at 18% rate.

Income from Dividends and other income from participation in the equity of resident bodies corporate, are subject to IRNR, at 18% rate. In accordance with Parent Subsidiary EU Directive, earnings distributed by resident subsidiaries in Spain to their parent companies that are residents of other EU Member States are exempt, provided the parent company holds a direct stake of at least 15% in another company (10% from 2009). This exemption was not applicable where the parent company was resident of a country or territory classified as a tax haven, but after the double tax treaty with Malta, Spain haven´t got any black listed territories in the EU, apart from the exception made in the Double tax treaty with Luxembourg, regarding the 1929 holdings.

Interest and other income from third-party loans paid by resident individuals or bodies corporate or PEs located in Spain, or interest and other income from loans of capital used in Spain, are subject to IRNR, at 18% rate.

Here again, interests are exempt (following the Lankhorst sentence from the European Court in December 2002 and EU Directive 2003/49/CE) when obtained by residents in other European Union (EU) Member States or by said residents' PEs in other EU Member States, except when obtained through a tax haven.

Royalties received from resident individuals or bodies corporate or PEs that are located in Spain, or royalties that are used in Spain, are subject to IRNR, at 18% rate.

A rate of 10% shall be applicable to royalties paid to a body corporate that is a resident of an EU Member State or a body corporate permanent establishment (PE) in another EU Member State (as resulting of EU Directive 2003/49/CE)

Income derived directly or indirectly from real-estate property located in Spain or from real rights derived there from (as rentals), is subject to taxation, at 24% rate. There is a special tax on holding of real estate properties by non resident corporate bodies, at 3% on taxable value of property, but it´s not applicable in case of Double tax treaty, or where the company carries out any economic activity (not just investments) in Spain, or where the company is public and quoted in any official market.

Capital gains are generally taxable, as those arising from investments in securities issued by resident individuals or bodies corporate, or any moveable property located in Spain or rights realizable in Spain, at 18% rate.

But there are important exemptions, a) in case of transfers of securities or sales of shares in investment funds, if they were carried out on official secondary securities markets in Spain and obtained by individuals or bodies corporate that are residents of a country with which Spain holds an agreement that includes a data exchange clause, provided said income is not obtained through a tax haven and b)

When obtained by residents in other European Union (EU) Member States or by said residents' PEs in other EU Member States are exempt, except when obtained through a tax haven.

Capital gains from real-estate property located in Spain are taxable at 18%

This includes capital gains derived from the transfer of shares, stakes or other rights in a body corporate, whose majority of assets consists of real estate property located in Spain.

Capital gains that are derived from the transfer of shares, stakes or other rights in a body corporate, in whose share capital or equity the taxpayer has directly or indirectly held at least a 25% stake during the 12 months prior to said transfer, are taxable at 18%

Yields from investments in public-debt securities, except when obtained through a tax haven, yields and capital gains from securities issued in Spain by non-residents, and yields of non-residents bank accounts are exempt.

Spain has a network of 60 double tax treaties available, and at least 7 under advanced negotiation.