Avoiding double tax with treaties and foreign tax credits

Key rules

• Credit limit: Your credit can never exceed the Spanish tax on that same foreign income.
• Carry-forward: Foreign tax above the limit can be used in the following four years.
• Proof: Keep proof of payment, the income and the year, because the tax office can ask for it.
• Over-withholding: Foreign tax above the treaty rate is reclaimed from the foreign country, not credited in Spain.

The short version

Once you are a Spanish tax resident, Spain taxes your income from all over the world. Other countries may tax the same income at its source. Two things stop you paying in full twice: a tax treaty between Spain and the other country, and a credit on your Spanish return for tax you paid abroad. The credit only works if you can prove what you paid.

How treaties split the right to tax

Spain has around 100 treaties, and most follow a common international model. The details differ by country, so read the treaty with the country you are dealing with. In general:

• Employment income: taxed where you do the work. There is an exception for short stays of up to 183 days.
• Business profits: taxed only where the business has a permanent establishment, meaning a fixed place of business.
• Dividends, interest and royalties: shared between the two countries. The source country's withholding is capped, typically at 5-15% on dividends, 0-15% on interest and 0-10% on royalties.
• Capital gains: gains on real estate are taxed where the property is. Gains on shares are generally taxed in the country where you live.
• Pensions: private pensions are generally taxed where you live. Government pensions are generally taxed by the country that pays them.

Where you live, the treaty says that country must relieve the double tax, by credit or by exemption. For a Spanish resident this is normally a credit.

How the Spanish credit works

You deduct foreign tax from your Spanish tax bill, but only up to a limit. The credit is the lesser of the foreign tax actually paid and the Spanish tax on that same income, and any excess can be carried forward four years.

• The foreign tax counted is what you really paid. It does not include any part that was refundable or not due under the treaty.
• The limit is worked out country by country and by type of income. It is not one pot for all your foreign income.
• Carried-forward amounts are still capped by the limit in each later year.

Prove the foreign tax

The tax office can ask for proof when it reviews your return. Keep documents showing that the tax was paid, the income it relates to and the year. The documents list below shows what is normally accepted. Foreign documents may need a translation, and the tax office decides case by case what is enough.

If the other country taxed you too much

Tax charged beyond what the treaty allows does not give you a Spanish credit. Do this instead:

1. Ask the source country for a refund under its own procedure. It will often want a certificate of Spanish residence.
2. If that fails, ask for a mutual agreement procedure under the treaty. You file it with the Spanish tax authority, which negotiates with the other country's authority.

Time limits for both steps are set by each treaty and the foreign country, and they are often short. Act soon after the tax is withheld.

Where to read a treaty

Spain's treaties (convenios para evitar la doble imposición) are published on the Hacienda and tax agency websites, in the international taxation section. The full texts are also in the official state gazette. Search for "convenios para evitar la doble imposición".

See the warning and FAQ below for common mistakes and quick answers.

Documents you need

• Foreign tax return or tax assessment showing the income and the tax charged, together with proof that you paid it

• Withholding certificate or statement from the payer or the foreign tax authority showing the income, the rate and the tax withheld, if you have no foreign return. It must show the tax was actually paid and the year it relates to

• Annual tax statement from your bank or broker, commonly used as proof of tax withheld on investment income

• Certificate of Spanish residence, often asked for by the foreign tax office when you claim a refund of tax charged beyond what the treaty allows

Double-tax and double-reporting traps for new residents

Double-tax and double-reporting traps

• Skipping income already taxed abroad: As a Spanish tax resident you are taxed on your worldwide income. Leaving out foreign income because it was already taxed abroad is a mistake. Declare the income in Spain and claim relief for the foreign tax, either through the treaty or through the foreign tax credit.

• Not claiming the foreign tax credit: If you do not claim the credit, you pay tax twice on the same income. The credit is the lesser of the foreign tax actually paid and the Spanish tax on that same income. It is worked out country by country and by income type. Any excess can be carried forward four years. Keep proof of the foreign tax paid and claim the credit in the same return that declares the income.

• Putting income in the wrong base: Work income, pensions, rental income and business income go in the general base. Dividends, interest, fund income and gains from selling shares, funds, property or crypto go in the savings base. Mixing them up changes the tax rate and the credit limit. Sort each foreign income item into its base before you calculate the credit.

• Missing the foreign asset declarations: Missing the foreign asset report (Modelo 720) or the foreign crypto report (Modelo 721) is costly. The old 150% fine has been removed. General penalties now apply: €20 per data item, minimum €300, for late filing, or €5,000 per item for omissions. Voluntary late filing gets lower fines. File within the yearly window if your assets are over the reporting thresholds. If you missed a year, file late before the tax agency contacts you.

• Leaving past foreign income undeclared: If you did not declare foreign income in an earlier year, correct it before the AEAT, Spain's tax agency, contacts you. A voluntary correction adds a surcharge of 1% plus 1% per full month, from 1% to 15% within 12 months and 20% after that, plus late interest after 12 months. If the agency contacts you first, penalties of 50% to 150% apply, with a 25% reduction if you agree and pay promptly. File a complementary declaration for each past year as soon as you spot the gap. Years go back four years.

Frequently asked questions

Where can I read the text of a Spanish tax treaty?

You can read every Spanish tax treaty on the Hacienda (Ministry of Finance) and AEAT websites, in the section on tax treaties or international taxation. Search for "convenios para evitar la doble imposición". Each treaty text is also in the Boletín Oficial del Estado (BOE), Spain's official gazette.

What happens if the foreign country taxed me more than the treaty allows?

Foreign tax above what the treaty allows gives you no Spanish credit, so you must recover it abroad. Ask the foreign tax office for a refund, often with a certificate of Spanish residence. If that fails, you can ask the AEAT to start a mutual agreement procedure, where the two tax authorities negotiate.

Is the foreign tax credit worked out for all my foreign income together?

No, the limit is worked out country by country and by type of income. The Spanish tax is computed on each foreign-source income as part of your total base. A high-tax country therefore cannot use up the room left by a low-tax one.

Do dividends and interest from abroad get taxed in both countries?

Yes, both countries can tax dividends and interest, but the source country's withholding is capped by the treaty. Typical caps are 5-15% on dividends and 0-15% on interest.