India-Spain Tax Treaty 2024 Amendment

Within the present global economy, nations increasingly seek opportunities to collaborate and establish alliances to leverage each other's strengths and foster economic growth. Spain and India, each possessing unique economic structures and vibrant cultural heritages, have forged a particularly promising partnership.

• The India-Spain Tax Treaty became effective on 12 January 1995.
• It avoids double taxation on income such as business profits, capital gains, royalties, and fees for technical services.
• It contributes to the growth of investments and collaboration between both countries.

What is the 2024 Amendment?

• Lower Tax rate of 10% notified on earning Royalty and Fee for Technical Services
• This major amendment to the India-Spain Tax Treaty has been introduced by the Indian Government on 19 March 2024.
• Under the notification, the applicable tax rate on royalty and fee for technical service fees has been reduced to 10 per cent from 20 per cent, the rate as per Article 13(2) of the India-Spain Tax Treaty.
• The amendment was initiated in accordance with the protocol that underlines any tax treaty signed between India and another Organization for Economic Co-operation and Development (OECD) member state after 1 January 1990, shall impose a lower tax rate on royalties. Hence, following the reduced rate in the India-German tax treaty, the lowered rate will also apply to the income tax treaty between India and Spain.

Applicability of Tax for Companies in Spain

Article 13(2) of the India-Spain Tax Treaty has been amended with effect from the assessment year 2024-25 and the following are the effects of the same on companies in Spain.

-    Royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State.

-    However, If the recipient is the beneficial owner of the royalties or fees for technical services the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.

Applicability of Tax on Spanish Companies providing Royalties or Fees for Technical Services in India

Spanish companies are only taxed on their income earned in India. Income in the form of royalties or fees for technical services is considered to have arisen in India and is thus taxable in India. Subsequently, Section 115A of the Income-tax Act of 1961 specifies the tax rate at which various streams of income in the hands of Spanish companies are taxable.

The Finance Act 2023, on the other hand, increased the withholding tax rate for royalties and fees for technical services income to 20 per cent plus surcharge and education cess. The tax treaties provide for lower tax rates on royalties and fees for technical services if the recipient is the beneficial owner.

Note: Spanish companies have the option of being taxed under the provisions of a tax treaty entered between India and the taxpayer's country of residence or under the Income Tax Act, 1961, whichever is more advantageous.

• To claim benefits under a tax treaty, Spanish companies must present a valid tax residency certificate (TRC) issued by the government of the country of residence.
• The Central Borad of Direct Taxes’ (CBDT) Circular 789 outlines that TRC is valid evidence for accepting the status of residence to avail the benefit of a Tax Treaty.

With the amendment in the India-Spain Tax Treaty, the rate of withholding tax on the royalty and fee for technical services has been reduced to 10 per cent as opposed to the earlier rate of 20 per cent, and 20 per cent is also prescribed under Section 115A of the Income Tax Act 1961.

While the Spanish companies can opt for the lower withholding tax subject to the compliances required in India, they are under an obligation to provide the following:

1)    Tax Residency Certificate of Spain issued by the prescribed authority.

2)    Form 10F under the Income Tax Act 1961.

3)    Permanent Account Number (PAN) under the Income Tax Act 1961

4)    Filling of the Income Tax Return under the Income Tax Act 1961.

Spanish companies that choose the advantageous tax rate on royalties or fees for technical services under the Tax Treaty must obtain tax registration in India, file tax returns in India, and comply with all other requirements to claim such benefits.

Applicability of Tax on Spanish Freelancers (who are not ordinarily Resident of India) for providing Royalty or Fee for Technical Services in India

The India-Spain Tax Treaty provides that Spanish professionals providing services such as royalties or fees for technical services can only be taxable in India if their period of stay in India exceeds 183 days.

The company receiving the services is under an obligation to withhold the income tax of the Spanish professionals which varies from 10% to 40%. The Spanish professional is under an obligation to observe the following compliances:

1)    Permanent Account Number under the Income Tax Act 1961.

2)    Filling of the Income Tax return under the Income Tax Act 1961.

Note: Spanish professionals whose number of stays does not exceed 183 days shall be taxable in Spain only.

Conclusion

Spanish companies and freelancers seeking to expand their operations in India must have a comprehensive understanding of the local laws and customs. It is crucial for them to establish strong alliances, conduct thorough market research, and adapt their products or services to meet the distinct needs and preferences of Indian customers and businesses.


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