background image
Treaty between Venezuela and Spain – application of MFN clause to interest income — Orbitax Tax News & Alerts

Venezuela and Spain signed a tax treaty on 8 April 2003. The treaty is in force as from 29 April 2004 and generally applies as of 1 January 2005.

In respect of interest, Art. 11 of the treaty stipulates the right to tax of the State in which the interest arises, as follows:


However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed: (a) 4.95% of the gross amount of the interest in the case of financial institutions; (b) 10% of the gross amount of the interest in all other cases

Certain categories of interest are exempt from tax at source (Para. 3 of Art. 11).

The treaty further contains a most favoured nation clause which, with respect to interest, stipulates that (Para. VII of Protocol): "If under a double tax treaty, concluded after the date of signature of this Convention, between a Contracting State and a state that is a member of European Union, it is accorded a tax (rate) lower than the one established in Article 11, then the provisions of the latter concluded treaty shall also apply, from the date of its entry into force, to this Convention".

Spain and Malta signed a tax treaty on 8 November 2005. The treaty is in force as of 12 September 2006 and generally applies as of 1 January 2007. Concerning the taxation of interest, the treaty stipulates an exclusive right to tax in favour of the state of residence (Para 1 Art 11): "Interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State".

Consequently, according to the wording of the above-mentioned MFN clause, it could be concluded that the provision in the Spain-Malta treaty has modified the taxation of interest under the tax treaty between Spain and Venezuela. As a result, the right to tax interest is attributed exclusively to Spain or Venezuela, whichever is the State of residence, as from 12 September 2006.

However, IBFD has been unofficially advised that the Venezuelan tax administration does not share this interpretation. Indeed, Venezuela reportedly considers that the Spain-Malta treaty does not trigger the MFN clause under the Spain-Venezuela as the former provides for exclusive taxation in the residence State, rather than in shared taxation but at a rate lower than that agreed under the Spain-Venezuela treaty.