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9. FOREIGN TAX CREDITS

Juridical Double Taxation

When foreign income is not exempt (see Sec. 6.6. Foreign dividends and Income from Permanent Establishments) Spain relieves international juridical double taxation by means of a foreign tax credit. This means that a tax credit is granted for any tax paid by the Spanish company abroad. Under domestic law, this foreign tax credit is provided for under article 31 Corporate Income Tax Law.  

As a general rule, where a foreign item of income is included in the overall tax base of a resident taxpayer, the latter is entitled to an ordinary tax credit equal to the lower of (i) the final income/corporate tax paid abroad on such item of income, and (ii) the part of the domestic tax corresponding to the foreign item of income. The domestic tax is computed taking into account losses carried forward from previous years (which may significantly reduce the chance for the taxpayer to be actually entitled to a foreign tax credit where the losses carried forward are close in amount to the overall income of the year).

The tax paid abroad must also be included in the tax base, even if it cannot be fully credited (for example, because it is higher than the tax that should have been paid in Spain on the same income). Taxes that have not been effectively paid (due, for example, to a tax benefit in the foreign country) cannot be credited. Also, in the case of income from a treaty country, the credit may not exceed the amount that should have been payable when there is a limitation provided for in the treaty.

If the corporate taxpayer has derived income in several foreign countries, the credit must be applied by grouping that from the same country (per country limitation), except income from permanent establishments (PEs), which must be computed separately for each of them.

Foreign taxes which have not been credited because of insufficient tax liability may be carried forward to the tax years that are closed in the following 10 years.

A few Spanish tax treaties (the most important being the one with Brazil) provide for tax matching credit mechanisms.

From 1 January 2016, taxpayers with net turnover exceeding EUR 20 million in the previous period are limited in the amount of double tax credits that may be claimed. For such taxpayers, the aggregate amount of domestic and international double tax credits claimed is limited to 50% of the pre-credit tax due for the year.

Economic Double Taxation

When foreign income is not exempt (see Sec. 6.6.), if the Spanish company received dividends from its subsidiaries abroad, article 31 of the Corporate Income Tax Law provides for a credit for any tax paid by the subsidiary in its country of residence.

This credit is subject to the following requirements: (i) the shareholding in the foreign company must be at least 5% (directly or indirectly) and (ii) the shareholding must have been kept for at least one year.

The Spanish company must include in its taxable base the gross amount received including tax paid by the foreign subsidiary.

This credit, together with the credit for the foreign withholding tax paid on the dividend, cannot exceed the total tax that should have been paid in Spain on the same income.

The foreign tax which has not been credited because of lack of tax liability (but not because they are higher than the Spanish tax would have been) may be carried forward to the tax years that are closed in the following 10 years.