Treatment of interests according to Barbados’ Tax Convention with Spain

The Convention to Avoid Double Taxation between Barbados and Spain contains a rule for the taxation of interests in the creditor’s place of residence.

Thus, Article 11 provides:

"1. Interest arising in a Contracting State whose beneficial owner is resident in the other Contracting State may be taxed only in that other State.”

However, the same Convention establishes a restriction on the application of this standard in the Convention’s Memorandum. The purpose of this restriction is to prevent, through the triangulation of Conventions, that one of the two countries ends up granting an exemption that would not have been applicable if the transaction would had been carried out directly.

Thus, paragraph 1.B. (a) of the Memorandum restricts the right to the application of the Convention to Articles 10 (Dividends), 11 (Interests), 12 (Canons) and 13 (Capital Gains) to the event that: “the income obtained by a Contracting entity which is paying dividends, interests, royalties or capital gain to a resident in another Contracting State arises in a territory without an agreement to avoid double taxation with that other Contracting State”.

Let's take an example:

Imagine a Barbados company granting a loan to a Spanish company and the Spanish company uses those resources to grant a loan to a company in Costa Rica.

According to the website of the Ministry of Finance of Costa Rica there is no CDI between Costa Rica and Barbados.

Consequently, and since Costa Rica lacks a Tax Convention with Barbados, the treatment of Article 11 of the Barbados-Spain Agreement would not apply. In the event of non-application of the Agreement, Spanish legislation on the taxation of non-residents operating in Spain will apply.

In this case, article 25 (f), 2º of Non-Resident Income Tax Law applies since it establishes a withholding tax of 19% for "interest and other income obtained from the transfer of own capital to third parties”.

In this made-up story that we are using as an example, it should also be considered that the agreement between Costa Rica and Spain determines a 10% withholding on interest on loans for a period not exceeding 5 years.