US-Spain tax treaty: benefits, rules, and how it affects expats

For Americans living in Spain, tax obligations can become complex when two systems overlap. The US-Spain tax treaty serves as the framework that defines who taxes what, from pensions to dividends, while modern updates reduce withholding rates and clarify residency tie-breakers. Its purpose is to allocate taxing rights, avoid double taxation, and provide clarity for expats, dual residents, cross-border workers, and international investors.

This article is brought to you by Taxes for Expats – we help Americans abroad navigate the US-Spain tax treaty and changing tax rules with clarity. By contacting us, we ensure you stay compliant while minimizing stress.

Aims, scope, and impact of the US-Spain tax treaty

Signed in 1990, this pact set the rules for how both countries tax each other’s residents. A 2013 protocol modernized the framework – cutting most interest and royalty withholding to 0% and revising dividend rules. It entered into force on November 27, 2019, alongside mandatory binding arbitration and specific effective dates.

As an income tax treaty, it defines who can tax which income and when. It also updates how passive income is treated across borders.

1. Eliminating double taxation via clear residence–source rules and coordinated credits.
2. Promoting fiscal cooperation through information exchange, MAP, and binding arbitration.
3. Reducing cross-border frictions by cutting source-country withholding on interest and royalties to 0% (with narrow exceptions like contingent interest).
4. Clarifying dividend taxation – 15% general cap, 5% for 10% corporate owners, and 0% in limited cases for certain parents and qualifying pension funds, subject to LOB.

NOTE! These goals evolved over time to help residents avoid double taxation. Here’s how the milestones line up with the policy shifts:

• 1990: Treaty signed at Madrid; original rates allowed up to 10% on interest and royalties.
• 2013: Protocol signed – introduced 0% on most interest/royalties, refined dividend tiers, added LOB and arbitration.
• 2019: Protocol entered into force; withholding changes applied from that date, with other items tied to taxable periods beginning after entry into force.

Residency rules: where taxes truly fall

Your residency determines which country claims primary taxing rights on salary, gains, and pensions. The income tax treaty then supplies tie-breakers when both systems say you’re resident.

Which tests make you a tax resident in each country?

Each country applies its own law first. The rules are objective and heavily day-count-driven.

1. United States – green card test. A lawful permanent resident is a US tax resident unless an overriding treaty position applies.
2. United States – substantial presence test. At least 31 days in the current year and 183 days over 3 years (all current-year days + 1/3 of the prior year + 1/6 of the second prior). A “closer connection” claim (Form 8840) can preserve nonresident status if conditions are met.
3. Spain – 183-day rule. You’re resident if you spend >183 days in Spain; sporadic absences count unless you prove foreign tax residence. Humanitarian/cultural stays are excluded.
4. Spain – center of economic interests & family presumption. You’re a resident if your main economic base is in Spain; it’s presumed if your non-separated spouse and dependent minor children habitually live there.

Dual-resident? How the treaty breaks the tie

Start with a permanent home. If homes exist in both, test the center of vital interests. If unclear, look to the habitual abode. If you have a habitual abode in both or neither, nationality controls. If still unresolved, competent authorities decide by mutual agreement. For entities with dual residence, benefits generally require competent authority agreement.

These steps align the tax treaty between the US and Spain with domestic rules, setting who is resident for treaty purposes.

• Individuals: Keep day-count logs and proof of home/economic ties; if you claim a tie-breaker on your US return, disclose with Form 8833 when required.
• Entities: Dual-residence risks can restrict treaty benefits until authorities agree – plan structure and management location accordingly.
• Passive income: Residency outcomes drive withholding relief and credibility for dividends, interest, and royalties under the income tax treaty.

US vs Spain residency tests – see which rules apply to you

Learn more

Savings clause – implications for expats

This rule anchors how the treaty works in practice. Below, you’ll see what it is, how it narrows benefits for Americans, and a quick example.

In the US-Spain tax treaty, the saving clause lets the US tax its citizens and residents as if the treaty didn’t exist. It’s a built-in reservation of taxing rights that overrides many reductions elsewhere in the agreement. That’s why expats must read any benefit with this clause in mind.

For US citizens and green card holders, many rate cuts and exemptions are off-limits because the clause applies first. The US may still tax worldwide income under domestic law, while narrow exceptions remain for relief from double taxation, non-discrimination, and the mutual-agreement process. So benefits aimed at nonresidents – like zero US tax on cross-border interest and royalties – generally don’t shelter you.

For instance, you live in Spain, hold US shares, and receive $10,000 in dividends. Treaty withholding rates for non-US investors are typically 15% (or 5% with a 10% corporate stake, and 0% in limited parent or pension-fund cases), and 0% for interest and royalties. But as a US citizen, you’re taxed under US rules; Spain then coordinates relief under Article 24 to prevent double taxation.

Avoiding double taxation exposure

The US-Spain tax treaty lets you combine treaty-rate relief with practical credits so tax is paid once, not twice. Below are the core methods – exemptions, credits, and deductions – and then a quick guide to using foreign tax credits in real cases.

1. Exemptions at source (treaty rates). After the 2013 protocol, most cross-border interest and royalties are taxed only by the recipient’s country, so 0% source-country withholding in standard cases. Dividends are generally 15%, 5% for 10% corporate owners, and 0% for qualifying pension funds (with LOB conditions and REIT/SOCIMI limits). These exemptions eliminate tax at source before any credit is needed.
2. Spanish credit for US tax (IRPF Art. 80). If you’re Spanish-resident and an item may be taxed in the US under the treaty (e.g., dividends capped at 15%), Spain typically grants a deduction/credit up to the Spanish tax on that item. But when the US taxes by reason of citizenship under the saving clause, Spain’s guidance says the relief should come from the US, not via Spain’s IRPF credit.
3. US foreign tax credit (Form 1116). On your US return, claim credits for Spanish taxes paid on the same category of income – separate baskets, limitation rules, and expense apportionment apply. This is often the main tool Americans in Spain use to neutralize overlap.
4. Deductions – rarely better than credits. Both systems allow deductions in some cases, but a credit usually gives stronger relief than deducting foreign taxes from taxable income. Use deductions only when the credit isn’t available or optimal.

Turning credits into results – clear, real-world steps

Credits work best when you map the flow of the income and the treaty rule first, then choose where to claim relief. The examples below show how double taxation is actually removed in practice.

• US dividends are taxed in Spain. When a broker applies the treaty rate of 15% in the US, Spain later subjects the same distribution to IRPF. Spanish rules let you offset up to that $150 withheld on a $1,000 dividend, so your final liability reflects only the higher of the two systems.
• Interest flows from the US to Spain. Treaty provisions reduce withholding on most bank interest to 0%, meaning nothing is collected in the US. Spain then taxes it once as savings income, with no credit needed because the payment arrived free of source-country tax.
• Worldwide earnings of a US citizen in Spain. Under the treaty’s deeming rule, tax imposed by the US purely based on citizenship is treated as Spanish-source, ensuring it can be matched by credits. In practice, many taxpayers anchor relief with Form 1116, aligning Spanish and US assessments so income is not taxed twice.

Income categories – the rules that count

Under the US–Spain tax treaty, here’s how the main cross-border payments are treated in 2025. Use these rules to source and report each type of income accurately across both systems.

When do business profits face tax abroad?

Profits are only taxed in the country of work if a permanent establishment (PE) exists. Under Article 5, a construction or installation site becomes a PE once it lasts more than 12 months. Without a PE, business earnings remain taxable solely in the taxpayer’s residence state.

Investment returns

The treaty sets clear limits on taxes for dividends, interest, and royalties.

• Dividends: 15% standard; 5% if the shareholder company owns 10% voting stock; 0% for certain 80%+ groups and qualifying pension funds (Articles 10, 29).
• Interest: generally 0% withholding; exceptions for contingent interest and REMIC residuals (Article 11).
• Royalties: 0% withholding, with exceptions if tied to a PE or if transfer pricing applies (Article 12).

How are capital gains taxed under the treaty?

Gains from selling property or assets depend on their type. Real estate is taxed where it is located, while shares tied to immovable property may also be taxed in the source state under Article 13. All other capital gains, including most securities, are normally taxed only in the seller’s residence state.

Employment and independent services

The treaty defines where wages, pensions, and professional fees are taxed.

• Employment: taxable where work is performed unless all three apply – 183 days presence, employer not resident, and no host PE costs (Article 14).
• Independent services: taxed in the residence state unless a fixed base exists in the other country (Article 14A).
• Private pensions/annuities: taxable only in the recipient’s residence state (Article 20).

How does the treaty handle other income?

Rental income from real property is always taxed in the country where the property is located (Article 6). For everything else, Article 23 applies: income is generally taxed only in the residence state, unless it is connected to a PE or fixed base abroad. Relief from double taxation comes through foreign tax credits under Article 24, ensuring no income is taxed twice.

Coordinating Social Security: US–Spain

This section shows how both systems work together so you don’t pay twice, and how to document your coverage cleanly. It also shows where social security rules interact with the tax treaty, so your broader filing plan stays consistent.

The totalization agreement between the US and Spain, in force since April 1, 1988, coordinates coverage and benefits to prevent dual social security taxation and to combine non-overlapping work credits. It covers old-age, survivors, and disability insurance on both sides (including the US Medicare tax component for contributions), but does not grant Medicare health benefits or SSI.

Detached-worker rules generally keep you in your home system for up to 5 years, and a Certificate of Coverage issued by SSA for US coverage or by Spain’s TGSS/INSS for Spanish coverage proves the exemption from the other country. This is how you avoid paying FICA and Seguridad Social on the same income. US rates are 6.2% Social Security and 1.45% Medicare (self-employed: 12.4% and 2.9%), with a 2025 Social Security wage base of $176,100.

Get clarity on your US–Spain tax obligations

Balancing two systems of taxation can feel overwhelming – especially when the treaty rules and local requirements overlap in unexpected ways. From clarifying how income is taxed in each country to making sure credits and filings align correctly, the fine print really matters.

That’s why our team at Taxes for Expats offers year-round support – so you can stay compliant and make the most of every benefit available under the US–Spain framework.

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