A new Tax Treaty between the United Kingdom and Spain

31 March 2014

On 14 March 2013 the United Kingdom and Spain signed in London a new Tax Treaty to renew the one currently in force, dated 1975 and amended in 1993. Following the contents of Article 28 of the new Tax Treaty, the Convention will enter into force after a period of three months following the date of exchange of instruments of ratification.

The Spanish Parliament ratified this new Tax Treaty on 9 December 2013 and the same did the UK on 11 December 2013. Therefore it can be expected that the new Tax Treaty will enter into force shortly. In our view, the most relevant changes introduced by the new Tax Treaty are the following:


1. Reductions of taxes at source with regard to royalties, dividends and interest.

The old Tax Treaty establishes that the source State may tax royalties at a maximum rate of 10% of its gross amount, whereas the new Tax Treaty establishes that the source State cannot tax royalties at all. Further to dividends, the actual news refers to individuals and pension funds, where the tax at source is reduced from 15% to 10% and from 15% to 0% respectively. Further to interest, the tax at source is reduced from 12% to 0%.

2. Indirect capital gains on real estate.

Following the contents of the OECD Model Convention, the new Tax Treaty introduces the option of taxing at source the capital gains arising from the sale of shares of companies which main asset consists on real estate located in the source State.

3. Partnerships, trusts or group of persons.

The new Tax Treaty introduces certain rules for the application of the Convention when an item of income, profit or gain is obtained by a partnership, a trust, a group of persons or other similar entity. Therefore, the new Tax Treaty recognizes the use and existence of trusts. Nevertheless, these rules only apply to trusts that have been established in the UK. Besides, the Protocol establishes a rule for Spanish residents that are beneficiaries of a UK trust. This rule allows deducting the tax paid in the UK through the tax credit method.

4. UK non-domiciled residents.

The new Tax Treaty contains a rule for UK non-domiciled residents. Following this new rule, when under any provision of the Tax Treaty, Spain reduces the tax rate or exempts from tax an income, profit or capital gain, and under the UK tax law this UK resident is subject to tax in the UK on remittance basis, then the Tax Treaty reduction or exemption will only be applicable provided that the income is actually taxed in the UK, in other words, provided that the income has been remitted or received in the UK.

5. Time-share rights on real estate.

The old Tax Treaty excludes from taxation, in the source State, to the income derived from time-share rights on real estate provided that these rights do not exceed four weeks per year. The new Tax Treaty reduces this term to two weeks.

For further information, please contact José Blasi