U.S. Tax Treaties: Spain vs. Portugal

	U.S. – Spain	U.S. – Portugal
Signed / Effective	February 22, 1990; Protocol January 14, 2013	September 6, 1994; Effective December 18, 1995
Main Objectives	Avoid double taxation; prevent tax evasion	Avoid double taxation; prevent tax evasion
Withholding Taxes	– Dividends: 10% → 5% for 10% shareholding; eliminated for 80% ownership – Interest: Eliminated – Royalties: Eliminated for tech-related payments	– Dividends: 15% general; 5% if ≥25% ownership for 2 years – Interest: 10% (exempt for government and long-term loans) – Royalties: 10%
Recent Updates	2013 Protocol: Lower withholding taxes, tech royalty exemption, mandatory arbitration	– OECD Pillar Two: 15% global minimum tax. – Digital economy rules and NHR regime – Enhanced info exchange and anti-abuse measures
Anti-Treaty Shopping	Limitation-on-benefits (LOB) clauses	Limitation-on-benefits (LOB) clauses

Treaty to Avoid Double Taxation Between Spain and the U.S.

The United States and Spain signed their first income tax treaty, 1990. This agreement, officially called The Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, includes 30 articles and a protocol with 20 provisions.

Purpose of the Treaty

The treaty has two main goals:

1. Avoid Double Taxation: It ensures that people or companies who earn income in both countries are not taxed twice on the same income. It explains who the treaty applies to and which taxes are covered; Each country agrees to give a tax credit for taxes paid in the other country; it sets rules for taxing different types of income, such as business profits, capital gains, Shipping and air transport income, dividends, interest, royalties, employment income.

Special rules apply to certain groups like government employees, diplomats, students, artists, and athletes. Taxes on capital are not included because the U.S. does not impose them, so there is no risk of double taxation. The treaty also provides a way for both countries to resolve disputes about double taxation.

• Prevent Tax Evasion: Spain and the U.S. agree to exchange information to enforce tax laws, it includes “anti-treaty shopping” rules to stop companies from third countries from abusing the treaty. A “saving clause” allows each country to keep taxing its own citizens and residents as if the treaty didn’t exist. The treaty does not reduce the basic tax obligations in either country; it only decides which country should reduce or eliminate double taxation.

The treaty was based on the U.S. Model Convention (1981), the OECD Model Convention (1977) and other recent treaties of both countries.

Protocol 2013: Major Updates

On January 14, 2013, Spain and the U.S. signed a new protocol that significantly changes the original treaty. Once ratified, it will reduce taxes on cross-border payments. Key changes include the permanent establishment: Construction projects now need to last 12 months (previously 6) to be considered permanent. About dividends, the withholding tax between associated companies drops from 10% to 5% (for 10% shareholding, previously 25%) and no withholding tax if a parent company owns 80% or more of voting stock for at least 12 months.

Withholding tax on interest is eliminated, creating equal treatment for U.S. and EU banks and no withholding tax on Royalties from technology-related payments (previously 5–10%). This benefits companies dealing with software, equipment leasing, and technical services. Both countries waive tax at source on share sales, except for real-estate holding companies.

Introduces mandatory arbitration for double taxation disputes, and states other provisions, such as, a better information exchange and cooperation, clear rules to prevent abuse of treaty benefits and special rules for certain taxpayers (e.g., U.S. REITs, Spanish SOCIMIs) and income types (e.g., pensions, annuities).

Puerto Rico: Spain and the U.S. will start talks to avoid double taxation on investments between Puerto Rico and Spain.

The treaty also introduces “anti-treaty shopping rules” which are provisions in international tax treaties designed to prevent companies or individuals from abusing the treaty to gain tax benefits they are not entitled to.

Treaty shopping happens when a person or company from a third country (not one of the two countries in the treaty) sets up an entity in one of the treaty countries just to take advantage of the treaty’s benefits—like lower withholding taxes—without having real business activity there. It allows outsiders to enjoy tax reductions meant only for residents of the two countries that signed the treaty, which undermines the treaty’s purpose.

These rules usually require the entity to meet substance tests (e.g., real business operations, employees, offices), to include ownership and base erosion tests (e.g., the company must not be mainly owned by residents of third countries, and most of its income should not be paid out to non-residents) and apply limitation on benefits (LOB) clauses, which clearly define who qualifies for treaty benefits.

In short, these rules ensure that only genuine residents of Spain or the U.S. can use the treaty, preventing “shell companies” from exploiting it.

Conclusion

The new protocol will encourage investment between Spain and the U.S., remove tax barriers and provide clear solutions to avoid double taxation.

Companies with business interests in either country should review these changes and explore new opportunities.

Treaty for the Avoidance of Double Taxation Between the United States and Portugal

The Convention between the United States of America and the Portuguese Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income was signed on September 6, 1994, and entered into force on December 18, 1995. Its purpose is to eliminate double taxation and prevent tax evasion for individuals and businesses operating between the two countries.

Purpose of the Treaty

The treaty has two main goals:

1. Avoid Double Taxation: Applies to U.S. federal income taxes and Portuguese IRS (personal income tax), IRC (corporate tax), and local surtaxes. Provides foreign tax credits and defines taxing rights for business profits: Taxed only where there is a permanent establishment. About dividends, 15% withholding, reduced to 5% for companies owning ≥25% of shares for two years and 10% withholding on Interest, with exemptions for government entities and long-term loans, royalties with 10% withholding, pensions and annuities: Taxed in the recipient’s country of residence and it includes special rules for students, teachers, and diplomats.
2. Prevent Tax Evasion: Both countries exchange tax information, and it also includes anti-treaty shopping provisions and a saving clause allowing each country to tax its own citizens as if the treaty didn’t exist.

Key Features and Benefits

Lowering rates on dividends, interest, and royalties encourage cross-border investment. It has clear Residency Rules, with Tie-breaker provisions that determine tax residency when both countries claim an individual as resident. It also provides a mutual agreement procedure (MAP) for resolving double taxation issues, ensures taxpayers from one country are not treated less favorably than domestic taxpayers in the other country and the alignment with OECD Model: The treaty largely follows the OECD Model Convention, ensuring international consistency.

Practical Implications

U.S. citizens living in Portugal remain subject to U.S. taxation on worldwide income but can claim foreign tax credits for Portuguese taxes and Portuguese companies investing in the U.S. benefit from reduced withholding rates and clearer rules on permanent establishments.

Businesses should review limitation-on-benefits (LOB) clauses to confirm eligibility for treaty benefits.

Recent Developments and Updates

1. OECD Pillar Two and Global Minimum Tax

Portugal has implemented the OECD Pillar Two rules, introducing a 15% global minimum tax for multinational enterprises with revenues over €750 million. The U.S., however, withdrew from the OECD global tax deal in early 2025, creating uncertainty for U.S. multinationals operating in Portugal. This divergence may lead to double taxation risks and compliance challenges for U.S. companies, as Portugal applies top-up taxes under Pillar Two while the U.S. does not.

2. Digital Economy and Remote Work

Portugal’s digital transition strategy and new regimes for digital nomads and remote workers have increased cross-border tax complexity, while the treaty does not yet include specific provisions for digital services taxation, Portugal’s domestic rules and EU directives may affect U.S. tech companies and freelancers operating in Portugal.

3. Recent protocols strengthen automatic exchange of tax information and cooperation on combating tax evasion, aligning with OECD standards and FATCA obligations.

4. Portugal and the U.S. have tightened LOB clauses to ensure treaty benefits apply only to genuine residents, preventing treaty shopping by third-country entities.

5. Special Regimes

Portugal’s Non-Habitual Resident (NHR) regime and new remote worker visa interact with treaty provisions, offering reduced tax rates on foreign-source income but requiring careful compliance with U.S. reporting rules.

Implications for Businesses and Individuals

U.S. companies in Portugal must review Pillar Two compliance and assess exposure to top-up taxes.

Digital service providers should monitor potential digital tax measures and treaty interpretations.

Expats and remote workers should plan for dual reporting obligations and leverage treaty benefits to avoid double taxation.

Conclusion

The U.S.–Portugal tax treaty remains a cornerstone for cross-border investment and tax planning. However, recent global tax reforms, digital economy developments, and enhanced anti-abuse measures require businesses and individuals to stay informed and adapt strategies accordingly.

If you have any further questions, please do not hesitate to ask us in this blog US Tax Consultants