Spain: New Tax Treaty Between Spain And Germany

On 8 October, the Council of Ministers authorised the signing of a new Tax Treaty ("TT") between Spain and Germany.

The TT was published on 18 March in the Spanish Official Congress Gazette. The following is a summary of what we believe to be the most relevant changes:

Capital Gains (Article 13 TT): Significant changes have been made in relation to the taxation of capital gains from the transfer of shares and corporate quotas:

• Capital gains obtained from the transfer of shares or quotas, or similar rights, in a company whose assets directly or indirectly consist of at least 50% property located in a signatory State may be subject to tax in such State.
• Accordingly, the profits obtained by Spanish companies from the transfer of shares in German companies whose assets are directly or indirectly comprised of at least 50% property located in Germany will be subject to taxation in Germany, notwithstanding the applicable exemptions existing under German law.
• In turn, the profit obtained by German companies from the transfer of shares/quotas in Spanish companies whose assets are directly or indirectly comprised of at least 50% property located in Spain will be subject to taxation in Spain at a rate of 19%.

Dividends (Article 10 TT)

• The reduced withholding tax rates applicable to dividends have been changed:

• Reference is made to the beneficial owner, to which the mentioned reduced rates will apply only if the beneficial owner of the dividends is resident in Spain or Germany, as the case may be.
• In addition, the definition of the term "dividends" has been amended and, according to the new TT, does not include the earnings received by a silent partner or a partner of a sociedad de personas, but includes income from certificates in a German "Investmentvermögen".

Partnerships (Article 4 TT): The TT cancelled a peculiarity of the former TT between Spain and Germany in Art. 4 para. 4 pursuant to which the partner of a partnership was always considered to be resident of the same country as the partnership in relation to the gains obtained from the partnership.

• For commercially active partnerships, there will be hardly any change because they qualify as permanent establishment.
• Mere asset management partnerships do no longer benefit from the provisions of the TT if they are resident in Germany and consequently the foreign partners of such partnership are no longer deemed resident in Germany for the income of the partnership. In contrast thereto, partnerships that are resident in Spain may still qualify for treaty protection according to Art. 3 para. 1 c) TT.

Interest (Article 11 TT): The withholding tax at source on interest received by the beneficial owner company resident in Spain or Germany has been eliminated.

Royalties (Article 12 TT): The withholding tax at source on royalties received by the beneficial owner company resident in Spain or Germany has been eliminated.

With regard to dividends and interest, it should be pointed out that Section V of the new TT Protocol provides for an extended taxation right for the State in which the income is generated, provided:

• the income results from profit participation rights, including income from silent partnerships (in Germany, "stille Gesellschaft") or debentures and or other kind of profit participation loans ("partiarisches Darlehen") or profit participation bonds ("Gewinnobligationen"), and
• such payment is deductible as business expense for determining the taxable income of the debtor of such payment.

Nevertheless, only a reduced withholding tax rate of 15% is applicable if the beneficial owner is resident in the other signatory State.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.