How does the distribution of dividends affect a company when its partner is not a tax resident in Spain?
There are many cases in which a company established in Spain distributes dividends to its partner who is not a tax resident in Spain.
In this type of case, both Spanish companies and non-resident partners encounter difficulties in determining the taxation of this income. This is due to the fact that not only are Spanish tax regulations applicable, but also the applicability of other types of regulations, such as the Conventions for the Avoidance of Double International Taxation between the country of residence of the partner and the country of incorporation of the company, would also come into play.
Throughout this article, we will analyse the key aspects to be taken into account in this type of case, such as corporate income taxation, applicable withholdings and the possible application of international double taxation treaties.
Corporate income taxation of the distribution of dividends to a partner not tax resident in Spain
The distribution of dividends by a partner to a company is treated for accounting purposes as an expense. However, the tax regulations, specifically the Corporate Income Tax regulations (Law 27/2014 of 27 November), establishes in article 15, section a) that:
‘Expenses that represent a return on equity shall not be considered as tax-deductible expenses’.
In other words, expenses arising from a dividend distribution will be considered as a return of equity and will be a non-deductible expense for the company.
In this respect, the tax regulations seek to correct the accounting result, in accordance with the corresponding tax rules and specifications. Therefore, the company must include the amount of this distribution in its corporate income tax settlement and pay 25% of this amount to the tax authorities.
Withholding taxes applicable in cases of dividend distributions to non-tax resident partners
However, once the accounting and tax nature of dividend distributions has been determined, it is necessary to determine whether a company is liable to withhold withholding tax or withholding on account for the payment of this type of income.
Article 128 of the Corporate Income Tax Act establishes that entities that pay income subject to corporate income tax are obliged to withhold income tax and must submit the corresponding declarations on the amounts withheld, in addition to an annual summary of withholdings.
In this respect, paragraph 6(a) of the aforementioned article establishes that the percentage of withholding or payment on account shall be 19%.
What role do International Double Taxation Conventions play in a dividend distribution?
In this type of situation, the first step is to determine whether the country of residence of the company’s partner has signed an agreement with Spain to avoid international double taxation and, if so, what the tax treatment is for this type of income.
A Double Taxation Convention is an international treaty between two countries, the purpose of which is to determine which country should be taxed on the income, when in principle both countries would be entitled to tax the income.
Spain currently has signed Double Taxation Avoidance Agreements with many countries, such as Italy, France, the United Kingdom, Turkey, the Dominican Republic and Mexico, among others.
In these Conventions it is established as a general rule whether taxation is exclusive for one of the states or, on the contrary, whether it is shared between the two states.
Notwithstanding the above, many Conventions set a maximum tax rate at which income can be taxed, as is the case between France and Spain, which sets a maximum rate of 15% for income derived from dividends.
Consequently, the non-resident partner of the company should provide a tax residence certificate from the country in which he resides. Thus, the company, instead of applying the withholding rate established in our Spanish domestic regulations – a withholding rate of 19% – will withhold the maximum rate established in a Convention for the Avoidance of Double International Taxation. If we continue with the example of France, it would be a rate of 15%.
Consequently, this would mean that the company could withhold less from the partner than the amount established in Spanish domestic law.
If the non-tax resident partner does not provide this tax residence certificate, the company will be obliged to withhold the percentage established in the Corporate Income Tax Act, i.e. 19%. In addition, the non-tax resident partner will be obliged to file a non-resident form requesting a refund for the difference between the withholding applied in Spain and that which would correspond by virtue of an International Double Taxation Avoidance Agreement.
Do you need advice? Access our area related to the tax aspects of the distribution of dividends to a company when a partner is not a tax resident in Spain: