- A double taxation treaty divides between two countries the right to tax each type of income, so that nobody is taxed twice.
- The text follows OECD standards and includes exchange of information, banking information too, between the tax authorities.
- It is not yet in force: after passing through Parliament and ratification, it will be published in the Official Gazette and become applicable.
On 24 August 2018 the Council of Ministers approved sending to the Spanish Parliament the treaty between Spain and the Republic of Cape Verde to avoid double taxation and prevent tax evasion in respect of taxes on income, together with its protocol. The agreement authorises Spain to express its consent to be bound by the treaty, in accordance with article 94 of the Constitution.
The treaty incorporates OECD standards and aims to provide an updated framework of legal and tax certainty for the taxpayers concerned, so as to facilitate economic flows between the two countries and cooperation between their tax authorities. It is news of interest to entrepreneurs with business in Cape Verde, to residents in Spain, and to those who receive income or hold investments there.
How a double taxation treaty works
Each State decides what to tax under its own rules, and it is common for the same income, for instance a dividend or a rent, to be taxable both by the country where it arises and by the country where the recipient lives. The treaty resolves that overlap: it sets which country may tax each type of income, limits withholding at source and provides methods for the country of residence to eliminate double taxation, by exemption or by crediting the tax paid abroad.
The text of the treaty with Cape Verde sets out criteria for income from real estate, business profits, maritime and air transport, associated enterprises, dividends, interest, royalties, capital gains, employment income, directors’ fees, income of artists and sportspeople, pensions, government service, professors, students and other income. As is usual in treaties based on the OECD model, such texts normally also include a mutual agreement procedure to resolve cases where two administrations interpret the treaty differently.
Exchange of information and fighting abuse
Modern treaties do not just share out taxing rights; they serve to fight evasion. The Cape Verde one includes provisions on exchange of information, banking information included, between both States, and in its protocol it contains provisions to prevent its abusive use for tax evasion or opacity in international capital flows.
In practice, that means the authorities of both countries will be able to cross-check taxpayers’ data. Anyone with accounts, property or investments in a country with which Spain has a treaty should assume that information can be cross-checked, and the obligations to declare assets abroad, such as form 720, remain regardless of the treaty.
What to review
While the treaty is not in force, each country’s domestic rules apply. Once it is, those with income or assets linked to Cape Verde, such as a business, a property or a pension, should check which country may tax them and how double taxation is avoided, and gather the tax residence certificates that are usually required to apply withholding limits.
It is also advisable to review each person’s tax residence, because it is the criterion that decides which treaty applies and in which country worldwide income is taxed. In cases with elements from several countries, planning should be done in good time and with specialist advice, since treaties have tie-breaker rules and precise conditions.
A treaty does not abolish taxes, but it prevents them from being paid twice and makes clear who collects what.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
