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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1233
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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I have dual citizenship (Spain and US). Ive been a US citizen,

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 $10000 in earnings in Spain , I have a $2500 withholding in Spain. Per my accountant here, only $1500 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 accoutants 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: 2 years ago.
Category: Tax
Expert:  Arthur Rubin replied 2 years ago.

Arthur Rubin :

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?

Arthur Rubin :

If you think you need an expert in Spanish tax law, I'll opt out, but my question above does indicate a possible resolution under US tax law.

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 US. I don't need an expert in Spanish tax law. I need an expert in US tax law. It is here that I'm being asked to pay again an additonal 10% in taxes over and above what I paid in Spain already.

Customer :

Again, I do not pay income tax in Spain...

Customer :

I'm not sure if you have the IRS Spain-US treaty, but I do and could attach for your convenience

Customer :

are you still there?

Arthur Rubin :

That, I found. The question I have is whether the 25% withholding is considered a "tax".

Arthur Rubin :

If you need to file a Spanish tax return to adjust the amount, then only the final amount due is allowable against US taxes.

Customer :

Absolutely it is a tax. It is sent to "Hacienda", the equivalent of the Spanish IRS

Customer :

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

Customer :

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.

Arthur Rubin :

If that's not your situation, then Article 26 seems to be the only way to go.

Customer :

That's not 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 US government the one taxing me an additonal 10% over my global income. This is a question of US law, not Spanish tax law

Customer :

I don't understand why my accountant here says that I have to pay an additonal 10% over and above what I've paid already

Customer :

I'm not sure if you have the entire picture clear.

Customer :

83.3% of owners of the business are non-residents. Imagine if the case was reversed, and it was 6 Spaniards owning a hotel here

Customer :

they don't have an lld

Customer :

just family. when earnings are distributed, they get 25% sent to the IRS

Customer :

I don't think the IRS would allow for an overseas business here to pay zero taxes to the US government. that's the point

Customer :

the hotel does not pay separate taxes in Spain

Customer :

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 US does pay taxes, but it's an actual tax, not withholding.

Customer :

well, this is a tax

Customer :

I'm not sure of the difference

Customer :

this isn't a trust either

Customer :

it's a family business

Arthur Rubin :

I understand it's different than a trust, but a "family trust" in the US is not a legal entity.

Customer :

which must send to Hacienda 25% from non-residents

Customer :

I'm not sure that's relevant since the business is not here

Customer :

The only person paying double taxes here is me.

Customer :

If this is not something you're familiar with, I understand...

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 a Spanish tax return because I"m not a Spanish citizen paying for taxes in Spain

Customer :

this is just the taxes that correspond to the earnings from the business

Customer :

The question I have is, if there's a treaty to avoid double taxation between the countries...shouldn't the US accept the entire 25% as taxes that I've already paid?

Customer :

I can't ask for relief from Spain...it would mean the business would not pay anything to the Spanish government

Customer :

I thought you left me :(

Arthur Rubin :

Has the IRS actually objected, or just your accountant?

Arthur Rubin :

My computer locked up.

Customer :

No, the accountant says that when he puts the figures into his computer, it only automaticall accepts 15% of the amount entered, meaning I have to pay the other 10% again

Customer :

I've not consulted the IRS directly

Customer :

I was hoping to get the answer here..

Arthur Rubin :

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

Customer :

???

Arthur Rubin :

Sorry. The foreign tax credit (US form 1116) is one of the usual ways of avoiding double-taxation.

Customer :

I think I filled out a regular 1040 and then TDF90-22.1

Customer :

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

Arthur Rubin :

Sorry, again. I'm at home, and there was a family problem.

Customer :

Have you heard the Kate Perry song...you're in and you're out...

Customer :

just kidding :) hope all is well

Arthur Rubin :

Form 1116 allows you to deduct, from your US taxes, the lesser of the foreign tax and the US tax on the same income.

Arthur Rubin :

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 (US) tax return, to see how your accountant has done it in previous years, if you got the full 25% then. (Please redact your name, address, and Social Security number before uploading)

Customer :

I know I did not get the full 25% credit, only 15%. I can send to you but have to scan it first.

Customer :

I just see that there was also a form 116 filled out

Arthur Rubin :

I have no objection to that. I'm going to need to take off for a birthday party shortly. I should be back by 10pm PDT. If you can have the return uploaded by then, I can look at it.

Customer :

ok

Customer :

I've had someone else look over these notes, and he thinks that since you're not really familiar with cases like this it would be best to just get the answer straight from the IRS

Customer :

I'd actually gone to his house to scan the tax returns because my scanner would not cooperate.

Customer :

I'd glad paid to get a straight answer, but I think this matter may be too complicated and needs an answer straight from the IRS

Customer :

I'm not sure how to close this ticket. I don't think I should pay since you're not really familiar on what to do in cases like this one

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