Double Tax Treaty Malaysia – Spain

Updated on Wednesday 21st November 2018

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Malaysia has signed a treaty for the avoidance of double taxation with Spain in 2006 and the document became effective starting with 1st of January 2008. The double tax agreement (DTA) signed by Malaysia and Spain is applicable to both natural persons and legal entities that obtain taxable income, residents of the two contracting states. 
 

What are the taxes covered by the Malaysia – Spain DTA? 
 

Spanish tax residents interested in opening a company in Malaysia or who want to relocate in this country for a specific amount of time will become liable for taxation as stipulated under the regulations of the treaty. The same is applicable to the citizens of Malaysia working or investing in Spain.  
 
According to the Article 2 of the tax treatyMalaysia applies only two taxes, namely the income tax and the petroleum income tax. In Spain, the agreement stipulates that the income tax on individuals, the corporation tax and the income tax on non-residents are available. 
 
The tax residency of a person is prescribed by the Article 4 of the treaty, which mentions that the residency is given by the place in which the person/entity is liable for taxation, determined by matters such as domicile, place of business and others. Our team of specialists in company formation in Malaysia can provide more details on the regulations concerning the tax residency of a business. 
 

What are the main provisions concerning the taxation of profits? 
 

When starting the procedure of company registration in Malaysia, a businessman will become liable for taxation in this country. However, when taking into consideration international businesses expanding on the local market, including Spanish companies, the manner in which the taxation of the business profits will be completed is given by the Article 7 of the double tax treaty, which stipulates the following: 
  • as a general rule, the profits of a business incorporated in a contracting state will be taxed in the contracting state in which the business was set up;
  • however, the profits of a company registered in a contracting state can be taxed in the other contracting state provided that it carries business operations in the latter state through a permanent establishment;
  • in the case in which a Malaysian company develops a business activity in Spain (and vice versa) through a permanent establishment, the profits will be taxed in Spain only for the income obtained through the respective permanent establishment;
  • the profits of a permanent establishment are calculated taking into consideration deduction expenses and executive/general administrative expenses. 
     

What is a permanent establishment under the Malaysia – Spain DTA? 
 

The legal meaning of a permanent establishment is given by the Article 5 of the double tax treaty. It generally defines a place of business through which the business operations of a company are performed, regardless if refers to a part of the company’s activities or to its overall operations. Our team of consultants in company formation in Malaysia can provide in-depth information concerning any regulations addressed to a permanent establishment. 
 
However, it is necessary to know that the term refers to any place of management of a company, such as an office, a branch office, a factory, a workshop, a mine or other types of facilities that are created for the extraction of natural resources, but it also defines a construction site and similar assembly projects that develop their business activities in the other contracting state for a period longer than twelve months.  
 

Taxation of royalties under the Malaysia – Spain DTA 
 

As per the Article 12, royalties define payments related to the right to use any type of copyright, trademarks, patents formulas, plans, know-how and others, granted by a company/person, to another entity. According to the same article of the treaty, royalties and technical fees arising in a contracting state that are paid to a tax resident of the other contracting state will be taxed in the latter state (as a general rule). 
 
But Article 12(2) stipulates that the payment of the royalties can also be concluded in the state in which they arise in specific conditions. However, it is necessary to know that if this regulation apply, the taxation will be concluded following the national legislation of the state in which they arise. 
 
In the case of royalties, the taxation will be imposed at a rate of 7% of the gross amount of the royalties, while in the case of fees for technical services, the tax will be applied at a rate of 5%. Businessmen are invited to contact our team of specialists in company formation in Malaysia for further information on other regulations referring to royalties in this country, as well as on any other matters prescribed under this tax agreement