A company resident in Norway has a permanent establishment in Spain, which is considering repatriation of profits to its head office in Norway.
The head office is resident in Norway, then the Convention between the Kingdom of Spain and the Kingdom of Norway on the avoidance of double taxation and the prevention of tax evasion in respect of Income and Wealth Taxes of 6 October 1999 (B.O.E. of 10 January 2001) becomes applicable.
Article 7 of the Agreement must be analysed for its taxation, which includes the power to tax company profits in the following terms:
"The profits of an enterprise of a Contracting State may only be taxed in that State, unless the enterprise carries on its activity in the other Contracting State through a permanent establishment situated there. If the enterprise conducts its business in such a manner, the profits of the enterprise may be taxed in the other State, but only to the extent that they are attributable to that permanent establishment.
That is to say, the income obtained by the permanent establishment in Spain will be taxed in Spain in the manner provided for in the Convention, in accordance with the rules contained in the internal regulations for determining its taxable base.
Royal Legislative Decree 5/2004, of 5 March, approving the revised text of the Non-Resident Income Tax Law (B.O.E. del 12), determines how to calculate the tax debt of a permanent establishment in Spain in Article 19, establishing a general tax of 35 per cent.
Section 2 of the same article establishes an additional tax of 15 per cent "when the income obtained by permanent establishments of non-resident entities is transferred abroad". However, section 3.b) of this same article provides that this complementary tax shall not be applicable:
"b) To income obtained in Spanish territory through permanent establishments by entities that have their tax residence in a State that has signed with Spain a convention to avoid double taxation, in which nothing else is expressly established, provided that there is reciprocal treatment.
Since there is a Double Taxation Convention between Spain and Norway, and the aforementioned Convention does not establish any tax on income transferred by the permanent establishment to its head office resident in the other State, such income will not be subject to any withholding or other tax for that reason. In conclusion, it is not necessary to declare repatriation of profits in Spain.
For the practical application of the provisions of the Convention, so that the payer does not levy any withholding tax, the recipient of the income must present to the payer a certificate of residence in Norway for the purposes of the said Convention, issued by the Norwegian tax authorities.
In Norway, this benefit will become part of the tax base of the head office and is therefore taxed in the State of residence of the company, giving rise to double taxation which is resolved in accordance with Article 24 of the Convention, i.e. by applying a deduction in its income tax equal to the amount of income tax paid in the other Contracting State, without such deduction exceeding the part of the tax calculated before the deduction corresponding to the income which may be taxed in the other Contracting State.