A double taxation agreement is a tool used by states to address the possibility of double taxation conflicts between two countries. These agreements prevent people, investors or companies from being obliged to pay twice for the same taxable event in two different countries.

In addition to respecting the rights of overseas workers, these agreements also serve to promote foreign investment, which might otherwise be discouraged if companies were forced to pay locally and in their country of fiscal residence for taxable activities. They reduce the tax burdens of foreign investors and provide legal security to investors.

In addition to preventing double taxation disputes, double taxation agreements can also be an effective weapon in the fight against fraud and tax evasion. For instance, the double taxation agreement signed between Spain and Andorra prevents people, investors and companies from paying taxes for the same accounting event in Spain and Andorra, which had been formerly used as a tax haven.

These agreements establish a series of rules that determine how to declare the benefits obtained based on their origin and thus avoid double taxation on the same person or company, the same income or possession.

One of the key components of double taxation agreements is the exemption method, in which the country of residency waives the tax on income obtained in another country.

Alternatively, the agreement may include the method of imputation, whereby income obtained in another country is included in the declarable tax base of the income tax return of the country of residency. In this second method, the state of residency will deduct from the quota of tax obtained either all the tax paid in the state of origin (total imputation) or the amount of tax that would have to be paid in the state of residency, if the income had been obtained locally (partial imputation).

In the case of Spain, according to the Ministry of Treasury, there are 103 double taxation agreements. Of these, 94 are currently in force, as the remaining 9, those signed with Azerbaijan, Bahrain, Belarus, Cabo Verde, Montenegro, Namibia, Peru and Syria, are still in various stages of processing. In addition, existing agreements with Austria, Belgium, Canada, the United States, Finland, India, Mexico, the United Kingdom and Romania have recently been renegotiated. A full list of the countries with which Spain has established a double taxation agreement can be found on the Ministry of Treasury website.

If you are thinking of making an investment or conducting temporary work in another state than your country of residency, it is prudent to know if there is a double taxation agreement between both, so as not to have problems when auditing the benefits with the Treasury of both states.

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