U.S.-Spain tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-Spain treaty apart

The 2013 protocol, in force since November 27, 2019, turned the U.S.-Spain treaty from one of the higher-rate treaties in Europe into a modern one. Interest and royalties went from 10% and up to 10% to exempt, the 5% dividend threshold fell from 25% to 10% of the voting stock, and a 0% rate was added for qualifying parents and pension funds. Two things did not change: Spanish contractors are still taxed only through a fixed base, and the student and trainee exemptions keep their $5,000 and $8,000 limits.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 1991. Protocols in effect from: Nov. 27, 2019. IRS country code SP.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-Spain treaty as a payer

Documents and dates

The convention and its protocol were signed in Madrid on February 22, 1990, with a general effective date of January 1, 1991. The amending protocol and memorandum of understanding are dated January 14, 2013. They entered into force on November 27, 2019, and, unusually, the withholding changes applied to amounts paid or credited from that same day, with no first-of-month or January 1 delay. A payer whose systems lagged leaves the Spanish owner to claim a refund under Code section 1464. The 2013 protocol replaced the dividend, interest, royalty, limitation-on-benefits and information exchange articles, deleted the branch tax article and added mandatory arbitration.

Residence and transparent entities

Income through an entity transparent under either country's law counts as derived by a Spanish resident only to the extent Spain treats it as that resident's income, and only if the entity is organized in the U.S., Spain or a country with an information exchange agreement with the U.S. (Art. 1(6)). Third-country partners cannot claim. For the dividend thresholds, a Spanish company is treated as owning its share of stock held through a transparent entity. A dual-resident company the competent authorities do not assign gets no benefits as a recipient, though payments it makes still get treaty rates.

Limitation on benefits

The 2013 Article 17 qualifies individuals, governments, listed companies whose shares are regularly traded and either trade primarily in their home region (anywhere in the EU for a Spanish company) or are managed there, subsidiaries at least 50% owned by five or fewer listed companies, charities, pension funds with more than half their beneficiaries resident in either country, and companies passing an ownership and base erosion test. Derivative benefits need 95% ownership by seven or fewer EU or NAFTA equivalent beneficiaries. A headquarters company test applies to a company supervising a group active in at least five countries. A triangular rule caps dividends, interest and royalties at 15% where income runs through a third-country branch taxed at less than 60% of the residence rate. The technical explanation says a pure headquarters company is not in an active business.

Dividends

The 5% rate needs a company owning directly at least 10% of the voting stock, tested on the record date; before 2019 it needed 25%. The 0% rate needs a Spanish company that has owned at least 80% of the voting stock, directly or through residents of either country, for the 12 months ending on the date entitlement is fixed, and that either: is listed or a listed company's subsidiary; passes both the ownership and base erosion test and the active business test; qualifies under derivative benefits; or has a competent-authority grant (Art. 10(3)). Spanish pension funds that are exempt or zero-rated get 0% on dividends not derived from a business (Art. 10(4)); the memorandum lists the qualifying Spanish funds.

RIC dividends get 15% (0% for pension funds). REIT dividends get those rates only for an individual or pension fund holding 10% or less, a holder of 5% or less of a listed class, or a holder of 10% or less of a diversified REIT (Protocol para. 7(b)). The U.S. branch profits tax is capped at 5%, and is 0% for companies that qualify for the 0% dividend rate.

Interest and royalties

Interest beneficially owned by a Spanish resident is taxable only in Spain (Art. 11(1)), except U.S. contingent interest that is not portfolio interest, which may be taxed at up to 10%, and REMIC excess inclusions, taxed under domestic law (Art. 11(2)). Royalties are taxable only in Spain (Art. 12(1)); before 2019 they were taxed at 5%, 8% or 10% by type.

The new royalty definition dropped two things the old one included: rent for industrial, commercial or scientific equipment, and technical assistance. Equipment rent is now business profits, and the technical explanation treats after-sales service, technical assistance and professional services (engineering, legal, software development) as services under the business profits or independent services articles. Software follows the U.S. regulations, and retail shrink-wrap software is not a royalty.

Services

Spain keeps an independent personal services article: a Spanish resident's professional fees are taxable in the U.S. only if a fixed base is regularly available here (Art. 15). Construction projects are a permanent establishment after 12 months (six months before 2019). Employees are exempt only if present 183 days or fewer in any 12-month period, paid by a non-U.S. employer and not borne by a U.S. permanent establishment or fixed base (Art. 16(2)). A Spanish director of a U.S. company may be taxed by the U.S. on fees for services performed outside Spain, but not on services performed in Spain (Art. 18). Performers and athletes are taxable once pay for the year, including reimbursed expenses, exceeds $10,000; the payer may withhold and refund after year-end (Art. 19).

Pensions and Social Security

Private pensions and annuities are taxable only in the country of residence (Art. 20(1)(a), (2)). Social Security, including Railroad Retirement, may be taxed by the paying country (Art. 20(1)(b)), so U.S. Social Security paid to a Spanish resident is withheld on. Alimony is taxable only in the recipient's country; child support only in the payer's.

Students and trainees

A Spanish student, professional trainee or grant recipient is exempt for up to five years from arrival on payments from abroad, the grant, and up to $5,000 a year of personal-services income. An employee or contractor of a Spanish resident who comes to gain experience from someone else, or to study, is exempt on up to $8,000 over 12 consecutive months (Art. 22). The amounts include anything already excluded under domestic law. There is no separate teacher article.

Other income, gains and arbitration

Other income, including prizes and awards, is taxable only in Spain (Art. 23). Since 2019, gains on shares are taxable only in the residence country unless the shares derive their value from real property; the old rule taxing gains on 25% holdings at source was removed. Mutual agreement cases can be presented within five years, and mandatory "last best offer" arbitration applies after two years.

Where payers get it wrong

• Using pre-2019 rates. Interest and royalties are exempt, not 10% and 5% to 10%. Only non-portfolio contingent interest (10%) and REMIC excess inclusions remain taxable.
• Requiring 25% for the 5% dividend rate. Since 2019 it is 10% of the voting stock, held directly.
• Granting 0% on ownership alone. The 80% holding for 12 months needs one of the four limitation-on-benefits routes.
• Treating equipment rent or technical assistance as royalties. Both left the royalty definition in 2019.
• Counting 183 days by calendar year. The employee test runs over any 12-month period.

Read from the treaty documents: Convention and Protocol of Feb. 22, 1990; Protocol and Memorandum of Understanding of Jan. 14, 2013; Treasury Technical Explanations of the Convention and the 2013 Protocol. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the Spain treaty's LOB provision is Article 17).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• f Includes alimony.
• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• u If enterprise earns income from leasing of equipment in the conduct of a trade or business, covered by Business Profits article (net tax). If passive income from the leasing of equipment, and not in Royalty article, covered by the Other Income article, if any. In Pakistan payment for TV broadcasting rights are covered by the Royalty article but not rental income from motion picture films.
• dd Amounts paid to certain pension funds that are not derived from the carrying on of a business, directly or indirectly, by the fund are exempt. This includes dividends paid by a REIT only if the conditions in footnote mm are met. For Sweden, to be entitled to the exemption, the pension fund must not sell or make a contract to sell the holding from which the dividend is derived within 2 months of the date the pension fund acquired the holding. The United States has competent authority arrangements (MAP) with some treaty jurisdictions (e.g. Netherlands and Switzerland) that describe which pension funds are eligible for the exemption. See the Competent Authority Arrangements page on irs.gov.
• jj The rate is 15% (10% for Bulgaria and Spain; 30% for Austria, Germany, and Switzerland) for contingent interest that does not qualify as portfolio interest. In general, contingent interest is interest that is determined with reference to (a) receipts, sales, income, profits or other cash flow of the debtor or a related person, (b) any change in the value of any property of the debtor or a related person, or (c) any dividend, partnership distribution, or similar payment made by the debtor or related person. For Sweden and Germany, contingent interest is covered by the dividends article of the treaty.
• mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.
• oo Dividends received from an 80% owned corporate subsidiary are exempt if certain ownership period and limitation on benefits conditions are met by the recipient. For Japan, greater than 50% ownership is necessary. See specific treaty article to determine other conditions.
• zz 15% rate applies if income is attributable to a permanent establishment which the enterprise has in a third state and the profits of that permanent establishment are subject to a combined aggregate effective rate of tax in the Treaty country and third state that is less than 60 percent of the general rate of company tax applicable in the Treaty Country. However, this higher 15% rate does not apply to (1) royalties received as compensation for the use of, or the right to use, intangible property produced or developed by the permanent establishment or (2) other income derived in connection with, or incidental to, the active conduct of a trade or business carried on by the permanent establishment in the third state (other than the business of making, managing or simply holding investments for the enterprise's own account, unless these activities are banking or securities activities carried on by a bank or registered securities dealer).

Notes to the services table (IRS Table 2)

• 2 Applies only if training or experience is received from a person other than alien's employer.
• 4 Does not apply to compensation for research work primarily for private benefit.
• 5 Grant must be from a nonprofit organization. In many cases, the exemption also applies to amounts from either the U.S. or foreign government. For Indonesia and the Netherlands, the exemption also applies if the amount is awarded under a technical assistance program entered into by the United States or the foreign government, or its political subdivisions or local authorities.
• 7 Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base. For residents of Korea and Norway, the fixed base must be maintained for more than 182 days (for Norway, 30 days in the case of the exploration or exploitation of the seabed and sub-soil and their natural resources); for residents of Morocco, the fixed base must be maintained for more than 89 days.
• 12 Fees paid to a resident of the treaty country for services performed in the United States as a director of a U.S. corporation are subject to U.S. tax.
• 15 Does not apply to payments from the National Institutes of Health under its Visiting Associate Program and Visiting Scientist Program.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 30 Exemption does not apply if gross receipts (or compensation for Portugal and Venezuela), including reimbursements, exceed this amount. Income is fully exempt if visit to the United States is substantially supported by public funds of the treaty country or its political subdivisions or local authorities.
• 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

Other treaty countries

Australia · Austria · Bangladesh · Barbados · Belgium · Bulgaria · Canada · Chile · China · Commonwealth of Independent States · Cyprus · Czech Republic · Denmark · Egypt · Estonia · Finland · France · Germany · Greece · Iceland · India · Indonesia · Ireland · Israel · Italy · Jamaica · Japan · Kazakhstan · Latvia · Lithuania · Luxembourg · Malta · Mexico · Morocco · Netherlands · New Zealand · Norway · Pakistan · Philippines · Poland · Portugal · Romania · Slovak Republic · Slovenia · South Africa · South Korea · Sri Lanka · Sweden · Switzerland · Thailand · Trinidad and Tobago · Tunisia · Turkey · Ukraine · United Kingdom · Venezuela