Global Tax Alert | 12 June 2013

Protocol amending Spain - Switzerland tax treaty to enter into force

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Executive summary

In July 2011, Spain and Switzerland signed a Protocol (the 2011 Protocol) to amend the Double Tax Treaty (the Treaty) signed on 16 April 1966, as well as the existing Protocol, which had been signed on 29 June 2006.

The 2011 Protocol has now been published in the Spanish Official Gazette and will enter into force on 24 August 2013.

Detailed discussion

Entry into force

The 2011 Protocol will enter into force on 24 August 2013, three months following the date of receipt of the notifications of the completion of the internal ratification procedures. According to Article 13 of the 2011 Protocol, its provisions will become effective:

  • In respect of taxes withheld at source, on amounts paid or credited, on or after 24 August 2013;
  • In respect of other taxes, for taxation years beginning on or after 24 August 2013;
  • In respect of the Exchange of Information clause as regards taxes covered by Article 2 of the Treaty, for taxable years beginning or for taxes due on amounts paid or credited, on or after the first day of January 2010;
  • In respect of the Exchange of Information as regards other taxes, for taxable years beginning on or after 1 January 2014 or for taxes due on amounts paid or credited, on or after 1 January 2014; and
  • In respect of new paragraph 5 of Article 25 of the Convention (Mutual Agreement Procedure), to mutual agreement procedures that are initiated on or after 24 August 2013.

Changes to the method for the elimination of double taxation on dividends received by Spanish residents from Swiss entities

The wording of the Treaty currently in force provides that an entity that is resident in Spain and derives dividends from a company resident in Switzerland shall be entitled to the same relief granted with regard to dividends received from Spanish resident subsidiaries. Under Spanish domestic rules, dividends received by a Spanish entity from a Spanish resident company enjoy a full tax credit (equal to an exemption) if the entity receiving the dividend has held at least 5% of the entity paying the dividend for a one-year period.

Dividends derived by a Spanish shareholder from a foreign entity are exempt only if all the requirements for the Spanish participation exemption regime are fulfilled; these requirements are more complex and more difficult to comply with than those required to apply the domestic full tax credit.

In practice, the provision of the Treaty currently in force implies that dividend income received by a Spanish parent from a Swiss subsidiary is exempt in Spain (by means of a full tax credit), without needing to meet the conditions of the Spanish participation exemption regime. Under the wording that is introduced by the 2011 Protocol, this will cease to be the case, and the Spanish entity's subsidiaries will have to meet the requirements of the Spanish participation exemption regime for dividends and gains to be exempt from taxation in Spain.

Capital gains tax on transfer of shares of real estate companies

The Treaty does not allow the State of source to impose tax on capital gains deriving from portfolio investments. The revised wording of Paragraph 3 of Article 13 under the 2011 Protocol enables the source State to impose tax on capital gains deriving from the transfer of shares (or comparable interest) of an entity when more than 50% of their value derives, directly or indirectly, from real estate located in such country.

Two significant exemptions are provided to capital gains tax imposed on the disposal of shares of real estate companies:

  • Transfer of shares of entities quoted on a Swiss or Spanish Stock Exchange (or any other Stock Exchange as may be agreed between the Competent Authorities); and
  • Transfer of shares of a company if the immovable property is used by this company for its own industrial activity.

Other changes

Most of the other changes to the existing Treaty seek to align it to the OECD's standards. This is the case, for instance, in the revised wording of Article 5 (Permanent Establishment), Article 9 (Associated Companies) and Article 25 (Mutual Agreement).

The 2011 Protocol reduces from 25% to 10% the participation required in the share capital of the company distributing a dividend for the resident in the other State to

benefit from the withholding tax exemption. The holding period is also reduced from two years to one year and new conditions to benefit from such exemption are introduced. In addition, a subjective exemption has been included on dividend payments to pension funds or pension schemes.

The 2011 Protocol includes a detailed and enhanced Exchange of Information clause to promote the cooperation between the tax authorities of both States.

Conclusion and recommendations

Multinational groups with cross-border investment structures that rely on the Treaty's method to avoid the double taxation on dividend income or gains received by their Spanish companies from Swiss subsidiaries need to ensure that these subsidiaries fulfill the Spanish participation exemption regime requirements or revisit their holding structure before the 2011 Protocol comes into effect.

The changes are also relevant for Swiss groups planning to dispose of their real estate investments in Spain. Gains from such disposition will generally be subject to Spanish capital gains tax once the Protocol comes into force (some exemptions are foreseen), while the current treaty may provide for an opportunity to reorganize investments in Spanish real estate without adverse tax consequences.

For additional information with respect to this Alert, please contact the following:

EY Abogados, Madrid
  • Laura Ezquerra
    +34 91 572 7570

  • Jose L. Gonzalo
    +34 91 572 7334

Ernst & Young LLP, Spanish Tax Desk, New York
  • Inigo Alonso Salcedo
    +1 212 773 8692

EYG no. CM3525