Spain proposes changes to non-resident Income Tax Law
The Spanish Ministry of Economy and Finance recently announced that the
government will submit a draft bill1 to Parliament that, among other matters, would
introduce changes to Spain’s nonresident income tax law.
The draft bill would be intended to facilitate the free movement of workers, the freedom
to provide services, and the free movement of capital between Spain and the rest of
the European Union (EU).
The following discussion, prepared by KPMG’s EU Tax Centre, in collaboration with
KPMG International, for its publication “Euro Tax Flash” (Issue 112, May 8, 2009),
provides an overview of the proposed changes.
Tax Exemption of Dividend Payments to EU Pension Funds
A new measure under sub-section (k) would be introduced in Article 14, par. 1 of the
nonresident income tax law. This rule would provide a tax exemption for dividends
paid by Spanish entities to EU pension funds or permanent establishments of such
funds located in another EU member state.
For the exemption to apply, the characteristics of an EU pension fund would need to
be similar to those of Spanish pension funds that are currently exempt from taxation on
domestic dividends. For these purposes, pension funds covered by the EU Directive
2003/41/CE would be considered to be “similar,” with the exception of those pension
funds included in Article 2, par. 2 of the Directive.
Nevertheless, the dividends concerned would be subject to Spanish withholding tax,
but this withholding tax would be refundable.
Net Taxation of Nonresidents' Income
The government’s proposal would also modify the rules for calculating the taxable base
of income of Spanish nonresidents who are resident in an EU member state and do
not have a permanent establishment in Spain.
The amendment, to be introduced in Article 24, para. 6 of the nonresident income tax law,
would be aimed at taxing the net income obtained by those nonresidents — rather than
taxing their gross income as is currently the case — so that nonresidents would receive
the same tax treatment as that applicable to residents.
The expenses to be deducted in order to determine the taxable base corresponding to a
certain income would have to be directly linked to such income. The taxable base
corresponding to each type of income would be determined in accordance with the rules
provided by the Spanish individual income tax law for the different types of income,
generally applicable to Spanish tax-resident individuals (not to entities/companies).
Follow-up of EU Commission's Infringement Procedures Against Spain
In October 2008, the European Commission announced that it had formally requested
Spain to change its tax provisions under which nonresidents are taxed on the gross
amount of their income (whereas residents are only taxed on their net income). The
Commission considered that these rules were incompatible with the EU Treaty, which
guarantees the free movement of persons and workers, the freedom to provide services,
and the free movement of capital.
In addition, in November 2008, the Commission announced that it had decided to refer
Spain to the European Court of Justice with respect to the Spanish rules under which
dividend payments to foreign pension funds may be taxed at higher rates than dividend
payments to domestic pension funds. In the opinion of the Commission, these rules
restrict the free movement of capital.
KPMG Note:
Observers have noted that the proposed amendments may have been motivated by the
procedures initiated by the Commission. Thus, the amendments to Spain’s nonresident
income tax law could be an indication that the government of Spain considers that the
current rules may provide for a potential discriminatory treatment of nonresident EU-based
taxpayers. It also has been observed that the proposed changes do not appear to
eliminate the possibility for nonresident EU-based taxpayers to seek a refund of taxes that
may have been paid in excess due to the application of the current tax regime.
Source: KPMG