A new Tax Treaty between Spain and Germany

 

On July 30, 2012 a new Tax Treaty between Spain and Germany was published in the Spanish Official State Gazette, replacing a prior Tax Treaty dated 1966. The new Tax Treaty will become effective on 18 October 2012, although its dispositions will not enter into force until 1 January 2013.

 

The announcement of its entry into effect and the applications of this Treaty offers opportunities for tax planning in Spain, within the scope of so-called “option economy”, which will apply to Spanish and German companies engaged in cross-border transactions.

 

The main new features of this treaty are as follows: 

 

As far as capital gains, of great significance is the introduction of an anti-abuse real estate clause, which means that capital gains generated from sale of shares or stakes in the companies, whose main assets directly or indirectly consist of real estate properties in Spain, will now be subject to taxation in Spain.

 

Also, there are new dispositions related to royalties, which will be no longer subject to taxation at origin, although associated entities may use the extension at origin starting from July 1, 2012, from application of Interest and Royalties Directive.

 

In regard to natural persons, the new text established that the Treaty will not apply to Spanish residents which have opted for application of a special regime for impatriates, also known as “Beckham Law”. This measure, which doesn’t really promote interchange, is in line with the definition of a resident in OCDE model. Substitution of the progressive exemption mechanism aimed to avoid double taxation by the ordinary taxation mechanism doesn’t help much, as well as the elimination of an exemption applicable to pensions.

 

Likewise, mechanisms for prevention of tax fraud in Spain will be reinforced by virtue of expanding an Article that governs the exchange of fiscal information, by inclusion of two new articles that stipulate assistance in tax collections and an effective beneficiary clause, as well as the effects of certain changes of residence.

 

As far as companies, maximum taxation at origin applicable to dividends shall be reduced from 10% to 5%, when the recipient of dividends is a company that holds at least a 10% stake in the authorized capital of the company (compared to prior 25%). In reality, this measure has a very limited practical application in regard to dividends distributed from Spain to Germany, if we take into account that exemption at origin applies for participations that are equal or greater than 5%.

 

In regard to interest, the new Treaty sets forth exclusive taxation at residence. Again, in case of interest paid to the individuals or entities that are German residents, this doesn’t have much practical application, due to the internal exemptions applicable to tax residents in any other country of the European Union.