LAW II - CASE 2

INDEX
I. Tax payer: Mr. Norkett
A. Employment Income
B. Royalties paid
C. Contributions to the US Social Security
D. Bank Account in US
E. British Start-up contributions
F. Ownership of French Villa

II. Tax payer: Mrs. Pérez

A. Employment income: opera singer
B. Employment income: lecturer
C. Income gain (royalties payment)

III. Tax events concerning both

A. Abode – Health insurance – High School
B. Rental of residential property in Greece

PS: Things to know

______________________________________________________________________________
Potential questions:

Analyse the tax position of Mr. norket and his family in tax years 2015 and 2016 -and determine their tax residence-
identifying other taxable events in Spain and abroad, and assessing the potential tax liability.
(credit method, exemption method)
Calculate the difference between applying the exemption method or the tax credit method considering the following
information
Getting used to the model tax treaty. Please determine which treaty will be applicable and use the Model Tax treaty to solve
these situations
what are the taxable events?
____________________________________
I. Tax payer: Mr. Norkett
A. Employment income

1. Initial work in US
- Chief engineer of the AERCOM USA Corporation
- Tax residence: in the US will be taxed in the US on a worldwide basis
- Gross salary: 60 000€ paid by the US Co.
- Net Salary = Gross salary – US WHT % . Net Salary= 60 000 – 0,25 . 60 000 = 45 000€

Potential questions:

Analyse the tax position of Mr. norket and his family in tax years 2015 and 2016 -and determine their tax residence- identifying
other taxable events in Spain and abroad, and assessing the potential tax liability.
(credit method, exemption method)
Calculate the difference between applying the exemption method or the tax credit method considering the following information

Getting used to the model tax treaty. Please determine which treaty will be applicable and use the Model Tax treaty to solve these
situations
what are the taxable events?

2. Final work in Spain

- Relocated in Spain in July 2016
- Construction management services in the construction of a bridge in BCN
- Gross salary: 60 000 + 30 000 = 90 000€ paid by the Spanish Co.

I actually don’t really know, from what I understood the 183 days are the national laws of Spain to be
considered as tax resident in Spain. the thing is he can’t be tax resident in 2 different countries during the
same year! from January to July it’s obvious he is tax resident in the US; but then as he moves in July to
Spain, he would have spent 183 days in Spain; so he can also be considered as tax resident in Spain. This
is why we have to look at the
Model Tax Convention, Article 4 “Residence”
1. 183 days ? → can’t decide because he spent 183 days both in the US and in Spain
2. having a permanent home available for him → Can’t decide both in US and in Spain (abode paid by
the spanish employer)
3. Economic and personal relationship → Can’t decide again because his family is moving in the same
time to Spain
4. Habitual abode → Same problem as permanent home available → in both countries
5. Nationality ? → He is a US citizen → So I guess that we have to consider him as being a US tax
resident in 2016. and will be taxed on a worldwide basis in US.

- Spanish Employment Income WHT for Mr. Norkett: 20% · 90.000€ = 18.000€ taxed; 72.000€ of
remaining profit

B. Royalties paid (Dmitry Mednov)

- AERCOM Spain pays royalty to AERCOM USA for the use of the know-how and patented structures
- Royalties WHT in Spain: 25%
- Royalties WHT in the US: 30%
- Model Tax Convention: Article 12 “Royalties”:
1. Royalties arising in Spain and beneficially owned by a resident of the US shall be taxable only in US
AERCOM SPAIN is a subsidiary of the AERCOM USA, so 30% will be paid in the US.

C. Contributions to the US Social Security

- [Mark continues his monthly contributions while living in Spain (as explained in the case)]
- Since he is still a US-TR until the following year, the first 6 months he works in Spain (183 days) he
can (and must) continue paying his SS contributions in the US (that is, from June to December,
when he lives and works in Spain but pays taxes in the US)
- This is a controversial situation, because when you are a Spanish tax resident, a part of your
gross income goes to SS contributions. This payment is mandatory by law for all spanish
employees. The US works a bit differently, because there exists a sanitary system which is not
universal (accessible to everyone): access depends on how much you pay. Since Spain has a
universal sanitary system, Mr Norkett will be obliged to pay the spanish SS contributions.
Nonetheless, on the US most businesses force you to pay a private health care insurance, which if
he wants, he can continue paying.
- Spanish SS payment will be mandatory.
D. Bank Account in the US
- Value of the account: 300 000 USD
- Interest paid per month: 200 USD (0,8% annually)
- Interest WHT in the US: 15%
- Model Tax Convention: Article 11 “Interest”
1. (Interest arising in the US and paid to a resident of Spain may be taxed in Spain. ) ← if we consider
him as a US Tax Resident then he’ll not be taxed in Spain on the interest
2. However, such interest may also be taxed in the US in which it arises and according to the laws of
the US, but if the beneficial owner of the interest is resident of Spain, the tax so charged shall not
exceed 10 per cent of the gross amount of the interest. The competent authorities of the US and
Spain shall by mutual agreement settle the mode of application of this limitation.
- provision of 1 and 2 don’t apply if Mr. Norkett, the beneficial owner, carries on business in the USA
through a permanent establishment.

According to the second entry of article 11, interest will be taxed in Spain and at the US as
well (legal double taxation), for a 10% (instead of 15%) of the gross amount of the interest.
10% * 200USD = 20 USD tax in the US

E. British Start-up contributions

- Gets dividends: 20 000 UKP / year
- Dividend WHT in UK: 35%
- Model Tax Convention: Article 10 “Dividends”
1. Dividends paid by a company which is resident of UK to a resident of the US may be taxed in the
US.
2. However, such dividends may also be taxed in UK where the company paying the dividends is a
resident and according to the laws of UK, but if the beneficial owner of the dividends is a resident of
the US, the tax so charged shall not exceed:
a) 5 % of the gross amount of the dividends if the beneficial owner is a company which holds directly at
least 25% of the capital of the Co. paying dividends
b) 15% of the gross amount of the dividends in all other cases
The competent authorities of UK and the US shall by mutual agreement settle the mode of
application of these limitations.

→ Here as we are dealing with an individual, the tax shall not exceed 15% (2b).
→ Tax payable: 0,15 . 20 000 = 3 000 UKP

- From January 2017 and on, until he leaves Spain, it will be the same tax procedure but in Spain

F. Ownership of French Villa

Inheritance of the house
- Inherited from his father in 2015
- Tax event: Succession of an estate property → Direct Taxation: inheritance tax (variable acc. to
law in given place/time)
 - No double taxation treaty: because it is not considered as an income.
- Have to see the domestic tax legislation → French

2. Rental of the house

- Tax event: Income from immovable property
- Model Tax Convention: Article 6: “Income from Immovable property”
1. Income derived by a resident of the US from immovable property situated in France may be taxed in
France.
- Double taxation => go to the national rule of the US –
- personal income tax doesn’t provide for exemption method but provides for tax credit method =
credit the taxes paid in France
→ To correct the double taxation of an individual we will look to the national laws of the country where
he is tax resident
→ If the US national rules don’t provide a method for double taxation you have to look at the double
taxation treaty to determine which method to apply to avoid double taxation.

- Rents it since April 2016: 2000€ / month

Credit method:
PIT in France over the: 2000€ give us the amount: A = (2000 - PIT% of 2000)
WHT over A give us the amount: B = (A - WHT% of A)
2000€ - B = D = (Tax already paid)
PIT in the US over the 2000€ gives us the amount: C = (2000 - PIT% of 2000)
Credit allows us to do the adjustment

C - D = F (Amount of tax paid in the US - Amount of tax paid in France)

So the Total tax on the real estate income will be F + D

3. Sale of the house

Wants to sell the house in France in January 2018 for 300 000€
Model Tax convention: Capital Gains (Article 13)
“Gains derived by a resident of Spain from the alienation of immovable property referred to in Article 6 and
situated in France may be taxed in France.”
Net earnings from sell: 300 000 euros – taxation corresponding in France

Tax in capitals gains of immovable property

Property transfer tax if it was to happen in Spain. We ought to check the French legislative framework to
determine the amount to be payed).

II. Tax payer: Mrs. Pérez

A. Employment income: opera singer
 - Laila will travel around the world performing concerts until september 2016. Therefore, according to
Article 17 of the Model Tax Convention (“Artists and Sportsmen”), she will pay taxes at the
Contracting State where the concert has been performed.

Earns 80.000$
Pays taxes in Spain (amount corresponding to spanish IRPF around 45% for her income since she earns
more than 60.000€. We can also assume that the non-specified WHT for Laila is the same as for Mr
Norkett, that is, 20%). She will earn additional 5000€ in Barcelona after her final concert, so she will be
taxed in Spain for 1000€, ending with net 4000€.

2nd case: if considered US TR due to its hypothetical permanent home, she would be charged 15% WHT
(80000x0,15= 12000)

B. Employment income: lecturer

- After the performing season (after september 2016) Laila has decided to stop her career for a
couple of years, but has accepted an employment offer from Opera for dummies, SA, as a lecturer,
in Spain. She will receive a monthly salary of 2000€.
Monthly salary = 2000 euros x 0,2 (WHT)* = 400; earning NET 1600€
- Main economic activity located in Spain (job), but she has spent less than 183 days in the
country.
- So, Tax Resident in US: Taxed in US for her worldwide income
- As Laila is considered tax resident in the US, she will be paying taxes in the US until she has
spent 183 days in Spain. When this happens she will be considered Spanish tax resident.
According to article 15: Income from employment:
1. Salaries, wages and similar remuneration derived by a resident of the US, shall be taxable only in
that State (US) unless the employment is exercised in the other Contracting State (Spain). If the
employment is so exercised, such remuneration as is derived therefrom may be taxed in that other
State (Spain).
2. Remuneration derived by a resident of the US in respect of an employment exercised in Spain shall
be taxable only in the US if:
a) the recipient is present in Spain for a period or periods not exceeding in the aggregate 183 days in
any twelve month period commencing or ending in the fiscal year concerned, and
b) the remuneration is paid by, or on behalf of, an employer who is not a resident of Spain, and
c) the remuneration is not borne by a permanent establishment which the employer has in the other
State.
- As the three conditions a, b and c are happening, the income will only be taxed in the US. But
this will only happen during the period of time when she is tax resident in the US while
working in Spain. After 183 days she is tax resident in Spain and she will pay her taxes there.
- During this period she will be applied the 15% US income employment WTH, the same as his
husband (0,15*2000=300 $; 1700 euros remaining), and then from 183 days spent in Spain
and on the 20% WTH corresponding in Spain
*assuming that the non-specified WHT for Laila, is the same as for Mr Norkett

C. Income gain (royalties payment)

Royalties received by Laila Pérez from an US corporation (Sony Music Entertainment), USD15.000
(She has recorded a single with Justin Bieber)
Royalties WHT in the US: 30% → $ 4,500
Remaining income: $ 10,500

“Articles 17 Artists and Sportsmen”:

1. Notwithstanding the provisions of Articles 7 and 15, income derived by a resident of Spain as an
entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsman,
from his personal activities as such exercised in the US, may be taxed in the US.

III. Tax events concerning both

A. Abode – Health insurance – High School

- Spanish employer pays for it
- Value: 15 000€
- it constitutes a permanent home for the family, no taxes paid over it by the family, if any taxes paid
on it, the taxpayer will be the employer.

B. Rental of residential property in Greece

- For next summer (2017) the couple plans on renting a Greek residential property (to use it during
the holidays; Summer, Christmas & Eastern)
- In this case, the couple is not deriving any income, but it is an expense for the couple as they are
renting the house for holidays.
- Therefore there is no income from immovable property, so no OECD tax article is applicable
(article 6).
- However, the consumption (renting) might be subject to a Greek indirect consumption tax (value
added tax). If applicable, this indirect tax would be included in the rental fee.
- Besides, not considered Greek residents as the personal and economic relations are closer to
Spain (article 4).

PS: Things to know

In 2016, Mr. Norkett just has a “tourist visa” which means that technically he can’t work!