Global Tax Alert | 5 June 2013

Spain - Kuwait tax treaty ratified

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Executive summary

On 5 June 2013, the Spain-Kuwait tax treaty was ratified through publication in the Spanish Official Gazette.

The treaty will enter into force on 19 July 2013. According to Article 28 of the treaty, its provisions will become effective: (i) on 19 July 2013 in respect of taxes withheld at source; and (b) in respect of other taxes, for fiscal years beginning on or after 19 July 2013.

Detailed discussion

The most salient features of the treaty are summarized below.

Reduction or elimination of withholding tax on dividends, interest and royalty payments

The treaty provides that no withholding tax applies to interest payments and to dividend distributions from qualifying participations (representing a minimum 10% participation in the share capital of the distributing entity) made by Spanish or Kuwaiti companies to residents in the other State, provided that the recipient of the income is the beneficial owner.

Dividends from non-qualifying participations and royalty payments benefit from a reduced 5% withholding tax.

Capital gains

The treaty eliminates capital gains tax imposed on the transfer of shares by residents of one Contracting State except (i) where more than 50% of the value of the shares or other similar rights (in principle, regardless of the residence of the entity whose shares are sold) derives directly or indirectly from immovable property situated in the other Contracting State; or (ii) where the transferred shares (in principle, also regardless of the residence of the relevant entity) or other rights directly or indirectly entitle the owner of such shares or rights to the enjoyment of immovable property situated in a Contracting State.

New favorable clause for EPC contractors

The protocol to the treaty includes a clarification of Article 7 (Business Profits) with regard to the attribution of profits to permanent establishments triggered by the existence of a building site, a construction, assembly or installation project that lasts more than 9 months. This clarification is of special interest to engineering, procurements and construction (EPC) contractors, as it explicitly excludes profits derived from the offshore works (generally, engineering, design, planning, research and procurement) from the income to be attributed to the permanent establishment.

Payments for industrial, commercial or scientific equipment are business profits

The payments for the use of, or the right to use, industrial, commercial or scientific equipment are expressly included in the definition of business profits (Article 7).

Specific definition of permanent establishment for consulting services

The treaty includes a clause whereby consulting services rendered by a company resident in a Contracting State by means of employees or personnel in the other Contracting State constitute a permanent establishment if the consulting activities, for a given project, exceed an aggregate of 6 months in any 12-month period.

Double taxation

Under the treaty, both Spain and Kuwait should apply a credit system to avoid international double taxation (but an exemption system for the avoidance of international economic taxation is always available under Spanish domestic law, subject to certain conditions). This notwithstanding, Spain will only eliminate double taxation arising from the Kuwaiti Zakat paid by Spanish tax residents when the effective payment to the Kuwait Zakat House or to the Kuwaiti tax authorities may be evidenced by means of a certificate issued by the Kuwaiti Ministry of Finance.

Beneficial ownership and domestic GAAR

The provisions of the treaty do not apply to those who are not the beneficial owners of the income. In addition, the treaty expressly sets forth that the Spanish and Kuwaiti domestic rules and procedures with respect to the abuses of law (including tax treaties) may be applied to the treatment of such abuses.

Conclusions and recommendations

Spain is continuing its commitment to improve its tax treaty network. The entry into force of the treaty should be beneficial and improve commercial transactions and cross-border investment between both countries.

More particularly, the elimination or reduction of taxation at source as well as the legal certainty provided by the inclusion of specific clauses on the attribution of profits to permanent establishments (limiting otherwise by far-reaching Kuwaiti PE income attribution rules) should enhance cross-border investments between the two countries, particularly in the area of construction and infrastructure projects in Kuwait by Spanish-based multinationals.

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

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

  • Alfonso Puyol
    +34 91 572 5010

  • Jose L. Gonzalo
    +34 91 572 7334

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

EYG no. CM3504