The United States and Spain signed, on January 14, 2013, a new protocol amending the existing 1990 income tax treaty between the United States and Spain, together with a memorandum of understanding (MOU).
The protocol is a significant development in that it modernizes the existing treaty and more closely conforms with both countries’ current tax treaty policies. Specifically, the protocol provides for exclusive residence-state taxation of interest, royalties, certain capital gains and certain parentsubsidiary dividends.
The protocol includes:
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updated limitation on benefits (LOB) and
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exchange of information articles,
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and also contains a mandatory binding arbitration provision.
While the protocol modernizes the provisions of the existing treaty, the LOB article represents a fundamental shift in US tax treaty policy in certain respects. For example, the protocol fundamentally changes long accepted US tax treaty standards under which a taxpayer may seek a discretionary grant of benefits in a case where the taxpayer does not satisfy the requirements of the tests set forth in the LOB. The protocol also adds a new restriction on the ability to meet the derivative benefits/equivalent beneficiaries test for treaty eligibility.