Interpretation of double tax agreements: static or dynamic?

Author

Mariano Blanco

Managing Partner

Spain

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The Spanish Supreme Court decides on the limitations of the application of dynamic interpretation of double taxation agreements.

The Spanish Supreme Court has analysed the application of the concept of beneficial ownership to the interpretation of article 12 (royalties) of the Double Tax Agreement (“DTA”) between Spain and Switzerland from 1967, following the Commentaries to the OECD Model Convention, which were drafted and published at a later date, despite the fact that no mention to beneficial ownership is included in Article 12 of such DTA.

The main discussion in the case revolves around the withholding tax rate applicable to the royalty payments made by a Spanish entity to its Swiss parent company, and where the US top parent company is the owner of the IP rights. Both the tax authorities and the Spanish National court understood that the DTA Switzerland-Spain was not applicable to the case, and therefore the royalties’ payments were subject to a general withholding tax rate.

One of the main arguments given by the Supreme Court is that, while other articles of the DTA Spain-Switzerland such as article 10 (interest) or article 11 (dividends) were amended in 2006 to include a reference to beneficial ownership following the new versions of the OECD Model Convention, the original text of article 12 remained intact.

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