US Senate ratifies amendment to the protocol of the tax treaty with Spain

The U.S. Senate ratified this week, on July 16, the protocol that modifies the agreement to avoid double taxation between the U.S. and Spain that has been pending since 2013. It is the first ratification of a protocol to a convention to avoid double taxation in that country since 2010. The ratification of the amendments to the Japan, Switzerland and Luxembourg treaties was also approved. All of them are very important.

The ratification was blocked by Senator Rand Paul (Republican, Kentucky) who was opposed to the American Treasury being able to provide tax information to other states of nationals of his country. Finally, it has been possible to overcome this hurdle in the plenary session with 94 votes in favor and 2 against.

The new protocol, which will now have to be completed in Spain, establishes in most situations a zero percent withholding rate on dividend payments (when the investor is a corporation that holds 80% of the subsidiary for at least one year), interest and royalties.

It also eliminates the substantive participation clause that allowed taxing capital gains made by U.S. investors in the sale of Spanish subsidiaries and the reason why they used companies from third countries to invest in Spain. This capital gain tax will continue to apply to the sale of real estate investments and assets of permanent establishments.

The new instrument will therefore facilitate direct investments in Spain by American investors, and vice versa, making the use of intermediate vehicles in the Netherlands or Luxembourg redundant in many cases. These countries normally channeled the bulk of investments from the U.S. to Spain.

The new instrument also sets a deadline of 6 months from the entry into force of the protocol to initiate talks leading to the conclusion of a double taxation avoidance agreement between Puerto Rico and Spain.