Spain has published the new income tax treaty with China in the Official Gazette, including notice that it will enter into force on 2 May 2021. The treaty, signed 28 November 2018, replaces the 1990 tax treaty between the two countries.

Taxes Covered

The treaty covers Chinese individual income tax and enterprise income tax and covers Spanish income tax on individuals, corporation tax, and income tax on non-residents.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12-month period.

Withholding Tax Rates

• Dividends - 5% if the beneficial owner is a company that has directly held at least 25% of the paying company's capital throughout a 365-day period that includes the day of the payment; otherwise, 10%
• Interest - 10%, with an exemption for:
  • interest paid to the other Contracting State, Central Bank, or any entity wholly owned by the other Contracting State, etc., or paid on loans guaranteed or insured by the other Contracting State, Central Bank, or any entity wholly owned by the other Contracting State, etc.; and
  • interest paid in connection with the sale of commercial or scientific equipment on credit
• Royalties – 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
• Gains from the alienation of shares or comparable interests deriving more than 50% of their value directly or indirectly from immovable property situated in the other State, excluding immovable property used by a company for exercising its business; and
• Gains from the alienation of shares, other than the above, of a company that is a resident of the other State if the alienator, at any time during the 365 days preceding the alienation, held directly or indirectly at least 25% of the capital of that company, with an exemption for shares substantially and regularly traded on a recognized stock exchange, provided that the total shares alienated during the fiscal year does not exceed 3% of the quoted shares.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation. Both countries also generally allow for an indirect credit for the underlying tax on profits out of which dividends are paid subject to certain conditions, including a minimum 20% holding in the case of China granting a credit.

Entitlement to Benefits

Article 24 (Entitlement to Benefits) provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Effective Date

The treaty applies in respect of taxes not withheld at source from 1 January 2022 and applies in all other cases from 2 May 2021. The 1990 treaty between China and Spain will generally cease to apply from the dates the new treaty is effective, although the provisions of Article 23 (Capital) will cease to have effect from 31 December 2021.