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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1541
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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Dual citizenship – Spain – USA.

Customer Question

I have dual citizenship (Spain and US). I've been a US citizen, have lived in the US, and have paid taxes in US for over 20 years. About 15 years ago, my grandfather passed away in Spain. He left a business, a hotel, that subsequently was divided into 9 unequal parts. My siblings and I now have 50% ownership (I have 10%). Since this is not an LLD, but a "sociedad de comuneros", which is a legal entity that is formed when an inheritance is distributed to heirs, and those heirs do not agree to forming a conventional business society (corporation) per se. Since I'm a legal resident of the US, the Spanish government withholds 25% of the earnings proceeding from the hotel business. Although there's a treaty between the US and Spain to avoid double taxation, my accountants here say that the US government only recognizes 15% of those taxes paid, and therefore, I've been paying an additional 10% here in the US.

To make matters simple in this example, if I received $10,000 in earnings in Spain, I have a $2,500 withholding in Spain. Per my accountant here, only $1,500 are recognized by the IRS, and I still have to pay an additional $1000 in taxes. That seems to me as a true case of double taxation. The accountant in Spain states that if what the accountants here are saying made sense, the Spanish government would be perceiving no earnings on a business in that country, since 83% of the total hotel ownership is from non-residents. They contend that I should ask the US government for relief under the article 26 of the agreement (conflicts about double taxation).

Can you give me an answer on this? I know it's not a simple question :)

Submitted: 5 years ago.
Category: Tax
Expert:  Arthur Rubin replied 5 years ago.

I don’t know Spanish tax law, but is the 25% withholding your full and complete tax to Spain, or do you need to file a Spanish tax return to report the exact amount of tax due?

Customer: Yes, the 25% is all I have to pay to the Spanish government. I don’t file an individual tax return in Spain since I’m a fiscal resident of the U.S. It is here that I am being asked to pay again an additional 10% in taxes over and above what I paid in Spain already. I’m not sure if you have the IRS Spain-US treaty, but I do and could attach for your convenience.

Arthur Rubin: The question is whether the 25% withholding is considered a “tax”? If you need to file a Spanish tax return to adjust the amount, then only the final amount due is allowable against U.S. taxes.

Customer: Absolutely, it is a tax. It is sent to “Hacienda”, the equivalent of the Spanish IRS. The accountant there, before distributing earnings to the owners of the business must send to “Hacienda” 25% of the earnings from each non-Spanish resident. He does not withhold from Spanish residents, because they include those monies with their regular income, and send payment to Hacienda when their total taxes are due. Same as we do here.

Only non-residents are withheld 25%. This amounts to 83.3% of owners. 6 out of 9 owners are non-residents.

Arthur Rubin: I’m not familiar with Spanish taxation; however, a provision I recently ran across in Canada, there is 25% withholding on the sale of real property by a non-resident, but the non-resident has to file a non-resident Canadian tax return to get a refund. If that’s not your situation, then Article 26 seems to be the only way to go.

Customer: That’s no my situation. This does not relate to the sale of anything. It’s income from a business. It’s not the Spanish government the one that needs to give me relief, it’s the U.S. government the one taxing me an additional 10% over my global income. This is a question of U.S. law, not Spanish tax law.

I don’t understand why my accountant here says that I have to pay an additional 10% over and above what I have already paid.

83.3% of owners of the business are non-residents. Imagine if the case were reversed, and it was 6 Spaniards owning a hotel here. They don’t have an LLD – just family. When earnings are distributed, they get 25% sent to the IRS. I don’t think the IRS would allow for an overseas business here to pay zero taxes to the U.S. government. That’s the point. The hotel does not pay separate taxes in Spain. The taxes the government gets are from the individual owners.

Arthur Rubin: I think a trust might be the nearest analogous entity; a “foreign” trust in the U.S. does pay taxes, but it’s an actual tax, not withholding.

Customer: Well, that is a tax. I’m not sure of the difference. This isn’t a trust either. It’s a family business.

Arthur Rubin: I understand it’s different than a trust, but a “family trust” in the U.S. is not a legal entity.

Customer: Which must send to Hacienda 25% from non-residents. I’m not sure that’s relevant since the business is not here. The only person paying double taxes here is me.

Arthur Rubin: Your accountant may have studies the application of the treaty provisions more than I have, but I don’t see how, if you aren’t encouraged to file a Spanish tax return to recover the withholding that the 25% wouldn’t be a foreign tax.

Customer: I can’t file the taxes that correspond to the earnings from the business. The question I have is, if there’s a treaty to avoid double taxation between the countries – shouldn’t the U.S. accept the entire 25% as taxes that I’ve already paid? I can’t ask for relief from Spain – it would mean the business would not pay anything to the Spanish government.

Arthur Rubin: Has the IRS actually objected, or just your accountant?

Customer: No, the accountant says when he puts the figures into his computer, it only automatically accepts 15% of the amount entered, meaning I have to pay the other 10% again. I haven’t consulted the IRS directly.

Arthur Rubin: Ah. If this is (U.S.) Form 1116, it might mean that your overall U.S. tax rate is 15%, so that only 15% of the profit is presently credited to your U.S. tax. The remaining 10% would be available in future years in which the U.S. tax rate is higher.

Sorry, the foreign tax credit (U.S. Form 1116) is one of the usual ways of avoiding double-taxation.

Customer: Yes, I filled out 1040, 6251, 5691 (for a new AC), and TDF90-22.

Arthur Rubin: Form 1116 allows you to deduct, from your U.S. taxes, the lesser of the foreign tax and the U.S. tax on the same income. If the foreign tax is more, it can be carried back one year and forward up to 10 years as a credit against years when the foreign tax is less.

Customer: What do you mean?

Arthur Rubin: I think I’d have to look at your (U.S.) tax return, to see how your accountant has done it in the previous years, if you got the full 25% then. (Please remove your name, address, and SS before uploading)

Customer: I just see that there was a Form 1116 filled out. I’ve had someone else look over these notes, and he thinks it would be best for me to contact the IRS.