India–Spain Tax Treaty (DTAA): Rates, PE Rules and What It Means for Your Business

India and Spain operate under a bilateral Double Taxation Avoidance Agreement (DTAA) that allocates taxing rights over income flows between the two countries. The treaty covers dividends, interest, royalties, fees for technical services, capital gains, employment income and business profits.

For Indian businesses incorporating a Spanish SL, or for Indian individuals relocating to Spain, the DTAA is the primary framework that determines: whether income is taxed in India, Spain or both; what withholding tax rates apply when money moves between jurisdictions; and when a business presence in Spain constitutes a taxable permanent establishment.

Spain has also ratified the OECD Multilateral Instrument (MLI), which has updated certain provisions of the India–Spain treaty — most significantly around permanent establishment definitions and anti-abuse rules. Any analysis of the treaty that does not account for the MLI modifications is outdated.

The following rates apply under the India–Spain DTAA to payments between Indian and Spanish entities. These are treaty caps — the lower of the treaty rate or the applicable domestic rate is used in practice.

Important — 2024 update on royalties and FTS: The original India–Spain treaty provided for a 20% rate on royalties and fees for technical services. In March 2024, India's Ministry of Finance issued a notification activating the Most Favoured Nation (MFN) clause in the treaty, importing the lower 10% rate from the India–Germany treaty. This reduction applies from financial year 2023/24 (tax year 2024/25). For Indian businesses licensing IP or providing technical services to a Spanish entity — or receiving them — this is a material change that directly reduces withholding cost on cross-border payments.

When a Spanish SL pays dividends to its Indian shareholder, Spain withholds tax at the domestic rate — currently 19% for EU and treaty countries — capped by the treaty at 15%. The Indian recipient can claim credit for Spanish withholding tax against Indian tax liability, subject to Indian domestic rules on foreign tax credits.

For an Indian founder holding 100% of a Spanish SL and extracting profits as dividends, the effective tax chain involves Spanish corporate income tax at 25% (or 15% for new companies in the first two profitable years), followed by Spanish withholding of up to 15% on the dividend, with credit available in India.

Structuring the ownership — whether directly, through a holding company or via a specific shareholder arrangement — affects both the withholding rate applied and the efficiency of the overall structure. The treaty does not provide a reduced rate for substantial shareholdings as some other Indian treaties do, meaning the 15% rate applies regardless of how much of the Spanish company the Indian shareholder owns.

When an Indian parent company lends to its Spanish subsidiary — or vice versa — interest payments are subject to withholding at a treaty rate of 15%. Spanish domestic withholding on interest paid to non-residents within the EU is generally 19%, so the treaty rate provides a meaningful cap.

Transfer pricing rules apply to related-party loans in both India and Spain. The interest rate must reflect arm's length terms — meaning a rate a third-party lender would charge in comparable circumstances. Both Spanish tax authorities and India's Income Tax Department scrutinize intra-group financing arrangements, and documentation of the arm's length rate is essential.

Spain also has thin capitalization rules that limit interest deductibility in certain conditions, relevant for Indian businesses capitalizing a Spanish SL partly through shareholder loans.

This is the most operationally critical question for Indian businesses with Spanish activity that has not been formally structured.

Under the treaty, a permanent establishment (PE) arises when an Indian company has a fixed place of business in Spain through which its business is wholly or partly carried on. This includes offices, branches, workshops and similar facilities. A building site or construction project that lasts more than nine months also constitutes a PE.

Following the MLI update, the treaty also incorporates an agency PE provision: if a person in Spain habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts on behalf of the Indian company — without being an independent agent — a PE can arise even without a fixed office.

For Indian companies with employees, representatives or sales agents in Spain, with customers in Spain or with management activity taking place in Spain, the PE question is not theoretical. A taxable presence can arise without any formal incorporation, triggering Spanish corporate tax liability on profits attributable to the Spanish activity.

The practical implication: if an Indian business has commercial activity in Spain — even managed remotely — the safest position is to formalize that presence through a properly structured Spanish SL rather than allow a de facto PE to develop without governance or compliance.

The treaty allocates taxing rights over capital gains depending on the asset type. Gains from the sale of immovable property are taxable in the country where the property is located. Gains from the alienation of shares may be taxable in both countries, depending on whether the company's assets are principally immovable property.

For Indian founders selling their Spanish SL — or for corporate restructurings involving a change in ownership — the capital gains treatment under the treaty should be reviewed alongside both Spanish and Indian domestic rules before any transaction is concluded. Spain imposes exit tax provisions on companies and individuals leaving Spanish tax residency with unrealised gains, which can interact with treaty provisions in complex ways.

For an Indian founder or company setting up a Spanish SL, the treaty provides a workable framework — but it does not eliminate tax cost. Dividends carry a 15% withholding layer. Royalties and technical service fees now face 10%. Interest on related-party loans is capped at 15% but subject to transfer pricing discipline.

The most efficient structures are those designed before the Spanish company is incorporated, with a clear view of how income will flow between the Indian and Spanish entities, what treaty claims will be made, what documentation is required to support those claims and how the PE risk is managed.

Getting the structure right at the outset is significantly cheaper than correcting it after the Spanish tax authority or India's Income Tax Department has raised questions.

This article provides general information only and does not constitute tax advice. Specific treaty positions should be confirmed with qualified tax advisors in both Spain and India, taking into account current treaty text, MLI modifications and applicable domestic law.