Double Taxation and Tax Treaties: Netherlands/Belgium – Spain

Double taxation can be an impediment to cross-border investments and the mobility of people and businesses. With the increase of globalization, individuals and companies often find themselves having to manage tax liabilities in more than one country. To address this, countries negotiate tax treaties—bilateral agreements designed to eliminate or mitigate the effects of double taxation. In this comprehensive article, we delve into the intricacies of double taxation and tax treaties, focusing on the specific contexts of the Netherlands, Belgium, and Spain.

Table of Contents

1. Introduction to Double Taxation
2. Principles of Taxation and Cross-Border Challenges
3. What Are Tax Treaties?
4. The OECD Model Tax Convention
5. Analyzing the Netherlands–Spain Tax Treaty
6. Analyzing the Belgium–Spain Tax Treaty
7. Treatment of Individual Income
8. Corporate Taxation and Cross-Border Business
9. Capital Gains, Inheritance and Gift Taxation
10. Eliminating Double Taxation: Methods Used
11. Recent Developments in EU Tax Cooperation
12. Practical Examples and Case Studies
13. Common Issues and Resolutions
14. Conclusion

Introduction to Double Taxation

Double taxation refers to the imposition of tax on the same income, asset, or financial transaction in more than one jurisdiction. This typically occurs in international settings, when a resident or an entity of one country generates income in another country. Without coordinated rules or treaties, this could lead to a scenario where both countries assert taxation rights over the same income—a disincentive for cross-border work, investment, or business.

There are generally two types of double taxation:

• Jurisdictional Double Taxation: When the same income is taxed by two different countries, usually the country where the income is earned (source country) and the country where the taxpayer resides (residence country).
• Economic Double Taxation: When the same income is taxed in the hands of two different taxpayers. This often occurs, for instance, with company profits first taxed at the corporate level and then again when distributed as dividends to shareholders.

For clarity, consider a Dutch national working in Spain: Spanish tax laws may tax income earned locally, while Dutch tax laws may tax the global income of their resident citizens. Without any agreements between the countries, this salary could be taxed in both nations. A similar challenge may arise for a Belgian company operating via a permanent establishment in Spain.

Principles of Taxation and Cross-Border Challenges

Before understanding the role of tax treaties, it helps to grasp the fundamental principles of international taxation. The two main bases on which countries claim taxing rights are:

• Residence Principle: A country taxes the worldwide income of its residents, regardless of where it is sourced.
• Source Principle: A country taxes income that arises within its territory, regardless of the taxpayer's residency.

When both the source and the residence country assert overlapping taxing rights, double taxation arises. This is particularly common within the European Union, where mobility is high and citizens or corporations often have interests in multiple member states.

The absence of harmonized direct tax rules at the European level means each country retains its sovereignty regarding tax legislation. While there are some EU directives (like the Parent-Subsidiary Directive or the Interest and Royalties Directive) designed to mitigate specific forms of double taxation, most mechanisms are bilateral through tax treaties.

Cross-border challenges that arise include:

• Determining tax residency for individuals and corporations
• Attributing income to various jurisdictions
• Dealing with withholding taxes applied by the source state
• Differences in the definition and timing of income recognition
• Transfer pricing issues between related parties
• Complications arising from capital gains, inheritance, and gift taxes

What Are Tax Treaties?

A tax treaty (double taxation agreement, or DTA) is a bilateral agreement between two countries designed to:

1. Allocate taxing rights over various types of income
2. Reduce or eliminate exposure to double taxation
3. Provide certainty and protect against fiscal evasion or tax avoidance
4. Establish mutual agreement procedures (MAPs) to resolve disputes

Treaties generally follow the OECD Model Tax Convention or, less frequently, the UN Model Convention. While they set the framework, each treaty is bespoke, reflecting the negotiating countries’ specific economic relationships and priorities.

Tax treaties typically cover:

• Personal and corporate income taxes: Salaries, pensions, dividends, royalties, interest, capital gains, income from immovable property, etc.
• Residence “tie-breaker” rules: Avoiding dual tax residence issues for individuals and companies.
• Permanent establishment: Definition for taxing business profits.
• Withholding tax rates: Limiting the taxes imposed by source countries on dividends, interest, royalties, etc.
• Methods for eliminating double taxation: Exemption and credit methods.
• Exchange of information and assistance in collection: Enhancing transparency and combating tax evasion.
• Mutual agreement procedure (MAP) for resolving disputes: Cooperation between the tax authorities of both countries.

The OECD Model Tax Convention

The OECD Model Tax Convention serves as the primary template for most modern bilateral tax treaties. It provides a standard approach for:

• Determining tax residency
• Definition of permanent establishment
• Allocation of taxing rights in categories such as business profits, dividends, interest, royalties, and employment income
• Dispute resolution mechanisms

Many key provisions in the treaties between the Netherlands and Spain, and between Belgium and Spain, are closely based on the OECD Model. Yet, important deviations or special provisions may exist in each treaty, reflecting the particular needs and interests of the countries involved.

How the OECD Model Treats Double Taxation

Key methods to eliminate double taxation are:

• Exemption Method: The residence country exempts income that has already been taxed in the source country.
• Credit Method: The residence country taxes all income but gives a credit for taxes paid abroad.

Which method applies is specified in the treaty and depends on the type of income and the bilateral agreement.

Analyzing the Netherlands–Spain Tax Treaty

The current tax treaty between the Netherlands and Spain was signed on June 16, 1971, and has since been amended by various protocols. Its primary aim is to avoid double taxation and prevent fiscal evasion with respect to taxes on income and capital. Here are its main features and how they apply in practice:

Scope of the Treaty

The treaty covers:

• Individuals and legal persons who are residents of one or both countries
• Taxes covered: Spain's income tax for individuals and corporations (IRPF, IS), and the Netherlands’ income, wages, and corporate taxes.

Residency Provisions

The treaty establishes rules for:

• Determining tax residency of individuals and companies
• Resolving conflicts (for example, if an individual qualifies as a resident in both states, “tie-breaker” tests such as permanent home, center of vital interests, habitual abode, nationality, or by mutual agreement)

Taxation of Different Types of Income

• Income from Immovable Property: Taxed by the country where the property is located.
• Business Profits: Taxed only in the residence country, unless the company operates through a permanent establishment in the other country.
• Dividends: Subject to reduced withholding tax rates (typically 15%, potentially lower if certain shareholding thresholds are met).
• Interest and Royalties: Usually subject to a maximum 10% withholding tax, with some exemptions or reductions.
• Employment Income: Generally taxed where the work is performed, with exemptions for short-term postings.
• Pensions: Paid to former employees can be taxed in the country of residence of the recipient, with some exceptions for government pensions.

Elimination of Double Taxation

The Netherlands generally applies the exemption method (for employment and business income, among others), while Spain applies the credit method (for most categories, allowing a deduction for taxes paid in the Netherlands).

Mutual Agreement Procedure

If a taxpayer believes that double taxation has not been properly resolved, they may request the tax authorities of the relevant country to initiate a mutual agreement process to resolve the issue.

Analyzing the Belgium–Spain Tax Treaty

The Belgium–Spain treaty was first signed on June 14, 1995, and came into force on January 21, 1999. It is a modern treaty, closely reflecting OECD standards, but with nuances according to the economic interests shared by both nations.

Scope and Taxes Covered

This treaty covers similar taxes as the Netherlands–Spain treaty, such as individual and corporate income taxes, but with particularities regarding capital gains and certain local taxes.

Residency and Tie-Breaker Rules

• Defines residency and applies tie-breaker rules to avoid dual residency situations.
• For companies, effective place of management is the key factor.

Key Provisions by Income Type

• Immovable Property: Taxed in the country where the property is located.
• Business Profits: Only taxed in the residence state unless a permanent establishment is present in the other country.
• Dividends, Interest, Royalties: Subject to preferential withholding rates, generally not exceeding 15% (dividends), 10% (interest and royalties), with exemptions for specific recipients.
• Employment Income: Follow the OECD line—taxed where work is performed, unless the 183-day rule is met.
• Pensions: Taxed in the country of residence of the recipient, except for government service pensions.

Elimination of Double Taxation

Belgium typically uses the exemption method with progression (exempting foreign income but considering it for rate purposes), while Spain applies the tax credit method.

Treatment of Individual Income

Let us examine how common categories of individual income are treated under the Netherlands–Spain and Belgium–Spain treaties:

Employment Income

Salary from employment is usually taxable in the country where the work is physically performed. An exception applies if the stay does not exceed 183 days in a 12-month period, the payer is not resident in the country where services are rendered, and the salary is not borne by a permanent establishment in that country.

• Practical effect: Dutch or Belgian residents working temporarily in Spain (such as foreign assignments of less than six months for an employer not established in Spain) may only be taxed at home. However, for longer assignments or local employment, Spanish tax applies.

Dividends

Generally, a Spanish company paying dividends to a Dutch or Belgian resident will be required to withhold tax, with treaty rates capping this (generally at 10-15%). The recipient can then claim a credit for Spanish tax paid on their home tax declaration.

• For substantial shareholdings (often >10% shares), more favorable withholding tax rates or exemptions may apply, subject to conditions reflecting EU directives and treaty terms.

Interest and Royalties

Interest and royalty income paid cross-border is subject to a reduced withholding rate (generally 10%) or exemption, based on the treaty. Both the Netherlands and Belgium, being EU member states, also benefit from EU directives on interest and royalties, which further reduce or eliminate withholding tax.

Pensions

Pensions are typically taxable only in the country of residence for private pensions, but government service pensions are usually taxable only in the source country (Spain for Spanish government service, Netherlands or Belgium for their civil service pensions). Dual-residence or split pensions may introduce complexity, usually resolved through the mutual agreement process.

Real Estate Income

Income from real estate is taxed in the country where the property is located, regardless of residency.

Capital Gains

Where individuals dispose of real estate, companies, or substantial shareholdings, the source country (i.e., Spain for Spanish property or Spanish companies) usually has the primary right to tax. For portfolio investments, taxation may be limited or excluded by treaties.

Corporate Taxation and Cross-Border Business

Corporations frequently face double taxation issues when operating internationally. Here’s how the relevant treaties address common issues—and how the rules interact with EU law and domestic anti-avoidance provisions.

Permanent Establishment ("PE")

A key determinant for taxing rights. The definition of ‘permanent establishment’ (fixed place of business, agency relationships, construction sites, etc.) is crucial in cross-border corporate arrangements.

• Profits attributed to a PE in Spain from a Dutch or Belgian company will be subject to Spanish taxation. The home country (Netherlands or Belgium) will grant a tax exemption or credit, according to treaty provisions.
• Income earned by overseas branches or operations not constituting a PE will not be taxed by the host country under treaty rules.

Business Profits and Branch Profits Taxes

The treaties assign taxable profits to the country where the company is resident, unless the income is attributable to a PE abroad. Spain imposes a branch profits tax on some foreign businesses; treaties may limit or eliminate this.

Transfer Pricing

Transfer pricing issues arise in transactions between related companies in different countries. Tax authorities in Spain, the Netherlands, and Belgium all apply the ‘arm’s length principle’—ensuring prices reflect what independent third parties would charge. Disputes can be resolved through a mutual agreement procedure or, in some cases, arbitration (in line with EU and OECD mechanisms).

Dividends, Interest, and Royalties for Companies

• For cross-border flows between group companies, both EU directives and treaty rules may apply, potentially eliminating or reducing withholding taxes.
• Beneficial ownership, substance requirements, limitation on benefits clauses, and general anti-abuse rules (GAAR) may restrict treaty benefits if used for aggressive tax planning.

Controlled Foreign Company (CFC) Rules

Both Spain and its treaty partners implement CFC rules in line with EU Anti-Tax Avoidance Directive (ATAD) standards. These provisions are not governed by treaties, but treaties provide for the exchange of information, which can support enforcement.

Capital Gains, Inheritance and Gift Taxation

Capital gains, inheritance, and gift taxes are often sources of double taxation due to less coverage in many treaties and more frequent differences in national law.

Capital Gains Taxation

Most treaties allow the source country (e.g., Spain) to tax gains from real estate or substantial shareholdings in local companies. Gains from portfolio investments are often taxable only in the residence country—although exceptions and anti-abuse measures exist.

Inheritance and Gift Taxes

Relatively fewer treaties address inheritance and gift taxes, making double taxation more likely. However, Spain has entered inheritance treaties with some EU states, though not all. Residents of the Netherlands or Belgium with Spanish assets, or vice versa, may face both Spanish and home-country inheritance or gift tax. Relief mechanisms or credit for foreign taxes may be available domestically, but careful planning is required.

Exit Taxes

Some countries levy ‘exit taxes’ on individuals or companies ceasing tax residency or migrating assets. Treaty relief may not always apply, and the EU’s Fundamental Freedoms may offer some recourse (based on ECJ case law).

Eliminating Double Taxation: Methods Used

The core function of any tax treaty is to relieve the taxpayer from being taxed twice on the same income. The two main methods are:

1. Exemption Method

The home country exempts the foreign-sourced income from taxation, either in full or for specific income categories, sometimes with 'progression' (meaning the tax rate in the home country is based on the total income, including the foreign income, even if the latter is exempt).

• Common in Belgium (especially for employment and business income).
• The Netherlands uses it for most active income categories.

2. Credit Method

The home country taxes all income but grants a credit for foreign taxes paid, expected not to exceed the home country tax on that income. If the foreign tax is less, the home country collects the difference; if it is more, no refund is granted beyond the home country’s own tax.

• This is Spain’s standard approach whenever the exemption method is not applied.
• Applies in both the Netherlands and Belgium for passive income (e.g., dividends, royalties) under their treaties with Spain.

3. Hybrid Approaches and Domestic Relief

National laws sometimes provide unilateral double tax relief where treaties do not apply, supporting further taxpayer protection.

Recent Developments in EU Tax Cooperation

Within the European Union, efforts continue to reduce obstacles to free movement by preventing double taxation and facilitating dispute resolution.

• EU Arbitration Convention: Provides mandatory arbitration for transfer pricing disputes between EU member states (including Spain, the Netherlands, and Belgium).
• Dispute Resolution Directive (2017/1852): Introduces a binding and enforceable framework for resolving double taxation disputes between EU tax authorities—benefiting taxpayers where MAPs under bilateral treaties fail.
• Parent-Subsidiary, Interest, and Royalties Directives: Further reduction or elimination of withholding taxes on intercompany payments.
• Anti-Tax Avoidance Legislation: ATAD implementation across the EU affects treaty benefits, CFC rules, GAAR, and exit taxation.
• OECD BEPS (Base Erosion and Profit Shifting) Implementation: The Multilateral Instrument (MLI) modifies many treaties (including potentially those discussed here), adding anti-abuse rules, improved MAPs, and revised PE definitions.

Practical Examples and Case Studies

Case Study 1: Short-term Dutch Employee in Spain

A Dutch resident is seconded to Spain by their Dutch employer for 5 months (less than 183 days). Under the treaty, the salary is only taxable in the Netherlands—if the employer does not have a Spanish permanent establishment and the salary is not borne by Spain. However, Spain may initially withhold taxes out of administrative caution, so the Dutch employee must apply for a refund under the treaty.

Case Study 2: Belgian Company Earning Interest from Spain

A Belgian company lends money to a Spanish corporation. Under the Belgium–Spain treaty, Spain’s withholding tax on interest is limited to 10%. Belgium includes the interest in taxable income but grants a foreign tax credit for Spanish tax paid.

Case Study 3: Retired Spaniard Living in the Netherlands

A Spaniard retires to the Netherlands, receiving both a Spanish social security pension and a small Dutch pension. Under the treaty, private pensions are generally taxed in the Netherlands. However, Spanish government pension income remains taxable in Spain. Double taxation is relieved through a Dutch exemption or credit method.

Case Study 4: Belgian Resident Selling Spanish Real Estate

A Belgian resident inherits and later sells real estate in Spain. According to the treaty, Spain may tax the capital gain on the sale. Belgium, applying the exemption method, does not tax the gain once taxed in Spain.

Common Issues and Resolutions

1. Determination of Residency

Dual residence cases can be complex—say, a Dutch entrepreneur who spends significant time in both the Netherlands and Spain. Treaties provide tie-breaker rules, but facts are crucial. The “center of vital interests,” habitual abode, or, lastly, mutual agreement between authorities decide the outcome.

2. Misapplication or Denial of Treaty Relief

Spanish, Dutch, or Belgian tax authorities may sometimes deny treaty benefits (e.g., due to lack of proper documentation, failure to meet substance or beneficial ownership requirements, or “abuse of law”). In such cases, mutual agreement procedures or EU-level arbitration may be necessary.

3. Timing and Character Mismatches

National laws may differ as to when income is recognized or how it is categorized (e.g., employment income versus business income). Treaty conflict clauses and mutual agreement procedures help, but pre-emptive tax planning and documentation are key.

4. Impact of Anti-Avoidance Rules

Increasingly, treaties include limitation-on-benefits articles or refer to domestic anti-abuse rules. Streamlined substance tests and reporting requirements (including DAC6 reporting, FATCA, CRS, and CbCR) seek to prevent improper use of treaties.

5. Tax Audit Risk and Penalties

Differences in tax administration—especially in Spain, where tax compliance and audit culture are rigorous—mean that careful proactive compliance and maintenance of full documentation are essential for those relying on treaty provisions.

6. Treaty Override

On rare occasions, domestic law changes may “override” treaty provisions (contrary to common international practice). EU law and courts provide the last line of taxpayer defense in such cases.

Conclusion

Double taxation remains a complex challenge for individuals and companies operating across borders, but the intricate web of bilateral tax treaties—such as those between Spain, the Netherlands, and Belgium—serves as a vital tool for minimizing risk and promoting cross-border economic activity. Each treaty, while following an OECD-based framework, reflects the unique relationship and mutual interests of the countries involved.

Through careful reading of relevant treaty provisions, understanding of the underlying principles, and proactive planning, taxpayers and advisers can navigate the challenges and avoid unnecessary tax burdens. The ongoing evolution of EU and OECD tax coordination, new anti-abuse measures, and enhanced dispute resolution mechanisms continue to improve the international tax landscape. Nevertheless, the need for thorough compliance and consultation with expert advisers remains stronger than ever.

Whether an individual working temporarily abroad, a retiree in a sunnier climate, or a multinational corporation establishing new business lines, double taxation can and should be avoided—with the right knowledge, planning, and recourse to international agreements.

Disclaimer: This article provides a general overview and does not constitute legal or tax advice. For advice on specific cases, always consult a qualified professional in the relevant jurisdiction.