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The importance of Double Taxation Agreements in a globalized world

In an increasingly globalized world, it is common to encounter cases of double taxation. Individual may be forced to pay taxes in two or more different countries for the same source of income in different situations. This can be an obstacle to international trade and investment.

This is why the need arises to establish Double Taxation Agreements. Spain has woven a wide network of Double Taxation Agreement. Spain has signed this type of agreement with more than one hundred different countries.

What are Double Taxation Agreements?

Double Taxation Agreements are bilateral agreements between two countries. The main objective of those agreement is avoiding and preventing double taxation. The main function of Double Taxation Agreements is to prevent taxpayers from being taxed twice on the same income. This creates a fairer and more predictable environment. It also gives legal certainty to taxpayers, which encourages foreign investment and boosts the country’s economic growth.

Each agreement is different and adapts to the needs of each country. Although most of them follow the model established by the OECD.

Furthermore, Double Taxation Agreements guarantee that the other signatory country is not considered a “tax haven”. Since at the time of signing the agreement an information exchange mechanism is established between both tax authorities. That allows cooperation on tax issues between both countries. For this reason, countries like Andorra or Switzerland are no longer tax havens from the Spanish side.

How do Double Taxation Agreements work?

Double Taxation Agreements establish the rules to determine in which country taxes must be paid, or how the tax burden must be distributed between them.

Continuing with the OECD model agreement, the most common thing is that the country where the taxpayer resides is granted the power to tax pensions. There are some exceptions as civil servant pensions, which would be taxed in the country of origin. Shared taxation is established in the case of rental income, capital gains and work income.

In the case of shared taxation, it is the country of residence that is responsible for allowing the deduction for double taxation. So that the tax payable is reduced by the amount of tax already paid in the country where the income comes from.

However, each agreement is different and has its own peculiarities. So it is necessary to be on the specific case. We recommend to have in both countries the services of a tax advisor specialized in international taxation who can guide and advise you on the matter.

“You must pay taxes. But there’s no law that says you gotta leave a tip.”–Morgan Stanley advertisement