Main advantages of the double taxation avoidance agreement between Spain and the Dominican Republic

International taxation plays a key role when planning any kind of cross-border transaction. Being subject to the taxes of the country where the income is obtained and the country of residence doubles the tax cost of the transaction. This is where Double Taxation Avoidance Agreementscome into play , whereby countries share the power to tax income, which is a great incentive for transactions between the countries that have signed the agreement . 

The Convention : 

In this context, the Double Taxation Avoidance Agreement signed between the Kingdom of Spain and the Dominican Republic, made in Madrid on 16 November 2011, although it did not enter into force until July 2014, represents a fundamental piece when planning the operations of a resident of one of the two countries in the other signatory country . 

The structure of the Convention in question follows the Model Convention published by the OECD in its 2010 version. Following this model, the mechanics of avoiding taxation in both countries are as follows : 

• A limitation of taxation is established in the country where the income is obtained, provided that the person who obtains the income is its beneficial owner . 
• In addition, the country of residence grants the right to apply one of the double taxation avoidance methods.  These methods are the exemption of the income taxed in the country of source or the deduction for international double taxation of the tax effectively paid abroad . 
  
  The Convention sets out the tax treatment that applies to each type of income and how to prevent double taxation between the two countries. In this sense, the purpose of this note is to explain the main advantages offered by the Convention when planning transactions between Spain and the Dominican Republic . 
  
  Advantages due to the treatment of income : 
  Firstly, the treatment of dividend payments established by the Convention is as follows : 
• Dividends received may be subject to taxation in the country of residence of the company receiving the income, although it may apply one of the methods to avoid international double taxation . 
• In addition, the payment of dividends may be taxed in the country of residence of the company paying the income, in general, at a maximum rate of 10% . 
• However, it is stipulated that no withholding tax will be levied, thus receiving gross income, if the recipient of the dividends holds directly at least 75% of the capital of the company paying the dividends . 
  
  This non-taxation in the source country greatly facilitates the generation of business structures and investment between the two countries, without additional tax cost to the tax of the country of residence. 

Secondly, the Convention provides for a withholding tax of 10% for the following income : 

• For interestpayments . 
• For the payment of royalties . 
• For payments for the provision of services. 

On the other hand, capital gains will only be subject to withholding tax if they derive from the transfer of real estate or shares or participations in real estate companies, i.e. those whose value derives more than 40% from real estate, located in the country of source. In addition, the rest of the capital gains will not be subject to withholding tax . 

Of particular relevance here is the non-withholding of gains derived from the transfer of shareholdings, provided they are not real estate companies, which allows the divestment to be carried out without additional tax cost in addition to the tax of the country of residence. 

Methods for avoiding double taxation : 

The Convention itself establishes the method which, in accordance with the domestic law of each country, will be used to avoid double taxation. In general terms, the methods established by the Convention are : 

• When a resident in Spain obtains income subject to taxation in the Dominican Republic, he may deduct the tax actually paid there, always up to the limit of what he would have paid if it had been obtained in Spain . 

• Otherwise, when a resident of the Dominican Republic obtains income subject to taxation in Spain, that amount will be exempt from Dominican tax. In the latter case, if the income obtained is interest, royalties or for the provision of services, the deduction method may be applied instead of the exemption . 

Other advantages of the Convention : 

Notwithstanding all of the above, a key advantage provided by the Convention is that it allows residents of the Dominican Republic to benefit from Spain's powerful network of double taxation avoidance treaties through the convenient corporate structure.  Currently, the Kingdom of Spain has 99 double taxation treaties in force. While, on the other hand, the Dominican Republic has only signed two, the Agreement with Spain and the Agreement with Canada. 

Furthermore, as Spain is a Member State of the European Union, it is possible to take advantage of the different measures to avoid double taxation approved by the Parliament and the Council of the European Union.  These measures include : 

• Directive 2019/2121/EU on cross-border transformations, mergers and divisions . 
• Directive 2011/96/EU on the common system of taxation applicable to parent companies and subsidiaries. 
• Council Directive 2003/49/EEC on the common system of taxation applicable to interest and royaltypayments . 

In this way, the Agreement allows residents in the Dominican Republic to operate in a multitude of countries around the world and, using Spain as an investment platform, to benefit from the agreements signed by Spain and the European Union directives with the enormous savings in tax costs that this entails . 

Finally, it should be added that on 3 October 2022, the Directorate General of Internal Taxes of the Dominican Republic approved General Rule No. 11-2022, which required withholding tax to be withheld without the limitations of the Convention, making it obligatory to request a refund, with the cost that this entailed. This General Standard was repealed by General Standard No. 05-2023 on 25 September 2023. With this, the normal operation of the Convention is restored, always applying the limitation to withholding or non-taxation automatically . 

On the basis of the above, we can conclude that the tax cost savings that the application of the Convention allows for is an exceptional incentive for the promotion of corporate structures and operations between the two countries . 

This incentive is not only due to the provisions of the Convention itself, but also because, through proper tax planning, it allows residents of the Dominican Republic to benefit from the privileged position that Spain has due to the large number of double taxation treaties it has signed with countries all over the world and its integration into the European Union. 

Article written by Patricia Cambronero, partner at Ecija in Madrid, Spain .