For U.S. citizens and residents living or doing business in Spain, one of the most common and misunderstood challenges is the risk of double taxation. This refers to paying income tax to both Spain and the United States on the same income.
Fortunately, the Convention between the United States and Spain for the Avoidance of Double Taxation provides a comprehensive legal framework to mitigate this risk. However, to benefit fully from the treaty’s protections, both accurate tax reporting and timely compliance are essential.
This article outlines how the treaty works, how income is treated in both countries, and the steps individuals and businesses should take to ensure tax compliance while avoiding dual taxation.
Understanding Double Taxation Between the U.S. and Spain
U.S. citizens and green card holders are subject to worldwide taxation by the IRS, regardless of where they reside or earn income. Meanwhile, if you are considered a tax resident in Spain, you are also subject to Spain’s personal income tax (Impuesto sobre la Renta de las Personas Físicas – IRPF) on your global income.
Without the bilateral tax treaty, this would mean being taxed twice on the same income. The U.S.–Spain Tax Treaty, signed in 1990 and amended by the 2013 protocol, was designed to prevent this.
Reference: BOE-A-1990-23971 – US-Spain Income Tax Convention
Key Protections Under the US–Spain Tax Treaty
- Tax Credits and Exemptions
Both countries allow foreign tax credits on income that has already been taxed in the other jurisdiction.
- U.S. taxpayers can claim the Foreign Tax Credit (FTC) using IRS Form 1116, reducing their U.S. tax liability by the amount of Spanish taxes paid.
- Spain, under the treaty, permits deductions or exemptions for U.S.-sourced income already taxed by the IRS, depending on the type of income and treaty application.
Reference: IRS – Foreign Tax Credit
- Residence and Tax Treaty Tie-Breaker Rules
Conflicts sometimes arise when both countries consider an individual a tax resident. The treaty provides tie-breaker rules based on the following:
- Permanent home location
- Center of vital interests
- Habitual abode
- Nationality
If needed, the Competent Authorities of both countries may initiate a Mutual Agreement Procedure (MAP) to resolve residency conflicts.
Reference: U.S.–Spain Tax Treaty, Article 4
- Withholding Taxes on Dividends, Interest, and Royalties
The treaty sets reduced withholding rates for cross-border income:
| Income Type | Standard Withholding | Treaty Rate |
| Dividends | Up to 21% (Spain) | 15% or 5%* |
| Interest | 19% (Spain) | Exempt** |
| Royalties | 24% (Spain) | 5% |
* 5% applies to corporate shareholdings of 25% or more.
** Interest payments may be tax-exempt under the treaty, depending on the type of debt and the relationship between the payer and the recipient, particularly in the case of related entities.
To apply reduced rates, IRS Form W-8BEN (individuals) or W-8BEN-E (entities) must be submitted to the Spanish payer.
References:
- Agencia Tributaria – Retenciones internacionales
- IRS – W-8 Series Forms
How to Remain Compliant in Both Jurisdictions
To fully benefit from treaty protections and avoid penalties or audits, individuals and businesses must:
- Determine tax residency in both countries
- File annually with the IRS, even if living abroad: forms 1040, 2555 (for work income), 1116 (all types of income).
- File with Agencia Tributaria, including Modelo 100 and Modelo 720 (if applicable)
- Maintain documentation proving taxes paid and treaty application, especially for audits
For Americans living in Spain or Spanish residents with U.S. investments, cross-border tax planning is not optional. It is essential.
How ARKOS Management Can Help
At ARKOS Management, we support internationally mobile clients, dual residents, and globally structured businesses with the following:
- Tax residency analysis and treaty interpretation
- Preparation and coordination of filings with both IRS and AEAT
- Structuring of passive income, payroll, and dividends in treaty-compliant ways
- Support with IRS foreign disclosures (FBAR, FATCA) and Spanish foreign asset reporting (Modelo 720)
Whether you are a digital nomad with a U.S. LLC or a business executive with interests in both countries, our bilingual team ensures full compliance while avoiding double taxation.
Get expert cross-border tax guidance today.
Contact our team for more information.
