The competent authorities of the United States and Spain have entered a mutual agreement on the treatment of limited liability companies (LLCs), disregarded entities, and Subchapter S corporations under the income tax treaty and protocol signed by the two countries on 22 September 1990.
The agreement provides that the phrase "any other body of persons" as used in the definition of "person" in Art. 3(1)(d) of the treaty, which is further defined in Para. 4 of the protocol, includes an LLC or other entity, whether organized within or without the United States, that is treated as a partnership or a disregarded entity for US federal tax purposes.
The competent authorities further agreed on the appropriate treatment under Para. 5(b) of the protocol, which defines the extent to which a partnership, trust, or estate will be treated as a resident of a contracting state. The competent authorities agreed that this provision will be interpreted to mean that income received by an LLC or other entity, whether organized within or without the United States, that is treated for US federal tax purposes as a partnership or a disregarded entity, will be treated as income derived by a resident of the United States to the extent that income received by the LLC or other entity is subject to US tax as the income of a US resident.
The competent authorities similarly agreed with respect to Para. 5(b) of the protocol that income received by an S corporation will be treated as derived by a resident of the United States to the extent that the income received by the S corporation is subject to US tax as the income of a US resident.
The mutual agreement outlines the procedures to be followed by LLCs, disregarded entities, and Subchapter S corporations seeking certification of residence status for purposes of claiming benefits under the treaty.
The text of the agreement was released by the US Internal Revenue Service (IRS) on 9 March 2006. It is effective retroactive to 1 January 1998 but will not apply to taxable periods that are barred by the statute of limitations.