What is a double tax treaty?

In essence the double tax treaty is an agreement between two countries whereby they both agree any income/gains that will be taxed solely in one country and will also state the method of relieving any double taxation that may arise.

It is acknowledged by the UK tax authorities that the terms of a double tax treaty override the UK's domestic tax legislation.

How does the The UK/Spain Double Tax Treaty affect matters?

The UK/Spain Double Tax Treaty  has a "tie-breaker" clause that comes into effect if an individual is classed as resident in the UK and Spain or otherwise subject to tax in both the UK and Spain. This clause will determine which country is to be given sole taxing rights, and prevents an individual being subject to UK and Spanish taxes on the same income.

The double tax agreement states that:

- If an individual is  resident in both the Spain and the UK, according to the domestic tax rules, he is to be deemed resident in the country in which he has a permanent home .

- If he has permanent homes available in both Spain and the UK, he is deemed to be resident in the country that is classed as his centre of vital interests. This is by definition a vague term, although it is generally regarded as the country with which an individual has the strongest ties and will therefore include both personal and financial 

To give you an indication you would therefore need to look at factors such as:
         - where he is employed
         - where family/friends are
         - where bank accounts and other investments are located
         - membership of any clubs/societies
        
- If it is still not possible to determine which country has the taxing rights, it is necessary to look at the individuals habitual abode, whichever country he has his habitual abode (which is similar to the concept of main residence) will be his country of residence.

- If he has a habitual abode in both Spain and the UK, an individual will be deemed to be resident in the country in which he is a national.

Examples

Jack spends approximately 190 days pa in the UK visiting his family (he stays with his son on visits to the UK). He regards Spain as his home and has purchased a large Spanish country property. All his investments are in Spain, and his wife is Spanish resident.

He would be likely to be treated as resident in both the UK (due to days spent in the UK) and Spain (where his centre of vital interests is, and he is married to a Spanish resident).

Under the terms of the UK-Spain double tax treaty, the country of residence for tax purposes would be the country where the permanent home is located. In this case, Jack would be treated as Spanish resident.

What else does the DTT say?

The treaty gives some specific rules that will apply to certain types of income, irrespective of the domestic tax treatment of UK or Spain.

Whilst the above rules will determine which is the country of residence, where an individual is resident in both the UK and Spain, it is also possible for an individual to be subject to double taxation due to the location of assets. Many countries, and the UK and Spain are amongst them, tax income arising from a source within their territory, irrespective of the residence position of the owner (examples could be UK bank interest, UK dividends, UK rental income). These are subject to UK tax even if received by a non resident.

However, in order to minimise this 'double taxation' the treaty has specifically stated in which country certain types of income can or will be taxed, when both countries may have a claim on the same income.

The summarised rules are as follows:

Rental income

This can be taxed in the country where property is situated.

For example, an individual may become Spanish resident and continue to own UK property. The rental income recieved would be subject to UK income tax, and Spanish income tax. Any Spanish tax suffered would be allowed as an offset against the UK income tax.

Dividend income

These are usually taxed in the country where the shareholder is resident, although there are provisions for a withholding tax in the country of company residence. Any withholding tax suffered would be eligible for double tax relief so as to avoid double taxation.

Interest Income
As for dividend income, this is taxed in the country where the beneficiary is resident although there are provisions for withholding tax.

Pension income

This is taxable in the country of residence. However, there is an exception if the taxpayer was a civil servant. In this case taxed in country of original employment

Example

Jason used to work for the Inland Revenue. He has now retired and lives and works in Spain. As a Spanish resident he would ordinarily be taxed on his worldwide income, however, by virtue of the UK-Spain double tax treaty, he would be taxed on his IR pension income in the UK.

Summary
The interpretation of double tax treaties is not straightfoward, and it is important to have a good understanding of the domestic rules before considering the interaction between the two countries.

An individual could be subject to double taxation by either
- Being resident in both the UK and Spain, or
- Being resident in one of these countries and owning income producing assets in the other

The treaty addresses the first issue by providing for a tiebreaker clause to ensure there is one country of residence, and the second issue by providing for double tax relief and granting sole taxing rights over certain income/gains.

To view further information on double tax treaties, Spain and overseas tax visit WealthProtectionReport.co.uk