On July 17, 2019, the US ratified the Protocolo (El Protocolo) that prevents double taxation between the US and Spain. This modifies changes made to the CDI- the original agreement made in 1990 to avoid double taxation between the US and Spain. This is a big step forward for economic entities doing business in both the US and Spain and will boost the flow of investment between the two countries.

These changes will come into effect three months after the deal is finalized.

What are the new modifications to the CDI?

There are a number of key modifications. Here are the most important:

  • Taxation on dividend income is reduced. If the dividend recipient owns at least 80% of a company’s share capital, the tax rate is 0%. If the recipient owns at least 10% of the share capital, the tax rate is 5%. If the recipient owns less than 10% of the share capital, the tax rate is 15%.
  • The Protocol introduces specific rules for the taxation of real estate investment trusts (REITs) and their Spanish equivalents (SOCIMIs). Dividends distributed to pension funds holding these real estate assets are granted some exceptions.
  • Interest income taxes in the source country are eliminated. However, there are some exceptions. For example, contingent interests and real estate mortgage investment conduits (REMICs) are treated differently.
  • Interest income from participatory loans is reclassified. Consequently, this interest income won’t be taxed at the source. It will only be taxed in the recipient’s country of residence.
  • Canons: The Protocol eliminates taxation in the source country. However, economic activities carried out by Permanent Establishments are not included in this modification.
  • Capital gains taxes: These are eliminated. The exception is when they derive, directly or indirectly, from real estate investment.
  • Gains derived from the transfer of intellectual property and licenses are requalified, so they will no longer be taxed in the source country.
  • The Protocol aligns taxes related to the exchange of fiscal information and mutual assistance with OECD standards. No explicit reference is made to FATCA.
  • Temporary Existence requirements for Permanent Establishments are extended from 6 months to 12 months.
  • Branch Taxes: Although the CDI eliminated Article 14 (which allowed for branch taxation), the Protocol incorporates a reference to branch taxation (taxation on branch offices, factories, workshops, etc.), capping it at 15%.

Limitations on who can benefit from the new Protocol to avoid double taxation between the US and Spain

The Protocol introduces a new clause that regulates who can benefit from avoiding double taxation between the US and Spain in the following situations:

  • Previously, publicly traded companies were exempt from the CDI. The new Protocol extends this exemption to all companies listed on a recognized stock market.
  • Entities that act as the headquarters of multinational companies (MNCs) can now benefit from the CDI.
  • “Triangle cases”- situations in which an EP is located in a third country-are specifically regulated. When their income is subject to reduced effective rates (for example when their tax rates are 60%+ less than the general rate applied to companies in the country in which they are headquartered), the EP cannot benefit from the CDI.

Pension Funds

The Protocol establishes that investments can be transferred between pension funds unencumbered. The tax is deferred to when the payment is made or a distribution takes place.

Friendly procedures and arbitrations

When a dispute arises with respect to differences in interpretation between the original CDI and the Protocol, it will be resolved between the two countries in a friendly procedure. Additionally, it mandates that disputes that are not resolved within two years must go to arbitration. Finally, the decision of the arbitration commission is binding in these situations.

Fiscally transparent entities

Fiscally transparent entities, such as LLCs, Partnerships and S-Corps, can benefit from the CDI and avoid double taxation between the US and Spain when:

  • Their income is attributed to a resident of the US or Spain
  • None of their income is derived from being granted an exception that is granted by the new Article of Limitation of Benefits
  • The entity is constituted or organized in the US, Spain or in a country that has an agreement in place that provides for the exchange of information between that country and the US and Spain


  1. Since both the US and Spain are OECD members and capital exporters, the Protocol’s new changes to avoid double taxation between the US and Spain will greatly increase the flow of investment between the two countries. This is because the Protocol eliminates the double taxation on passive income (dividends, interest income and capital gains) by clearly establishing that passive income is taxed in the benefactor’s country of residence.
  2. The only exceptions to the rule above are when the passive income is derived from an EP operating in a third party country and when the passive income is derived from real estate investments.

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