Capital Gains Tax Rate Between India and Spain
The India-Spain Double Taxation Avoidance Agreement (DTAA), signed on 8 February 1993 and effective from 12 January 1995, addresses capital gains taxation under Article 14 (Capital Gains). The treaty has been modified by the Multilateral Instrument (MLI), which came into force for India on 1 October 2019 and for Spain on 1 January 2022, introducing anti-abuse provisions including the Principal Purpose Test (PPT).
Article 14 of the India-Spain DTAA takes a selective approach to capital gains taxation. Unlike treaties that grant blanket source-country taxing rights on all share disposals, the India-Spain treaty restricts India's right to tax capital gains on shares to cases where the Spanish investor holds a participation of at least 10% in the Indian company. For holdings below 10%, capital gains on shares are taxable only in Spain. This threshold has been the subject of significant litigation in Indian courts and creates planning opportunities for Spanish investors.
For personalised guidance on structuring investments under this treaty, consult BeaconFiling's tax advisory team.
Treaty Rate vs Domestic Rate: Detailed Comparison
Article 14 of the India-Spain DTAA establishes a structured framework for capital gains based on asset type and shareholding levels:
Immovable Property (Article 14(1))
Gains from the alienation of immovable property situated in India may be taxed in India at full domestic rates. This includes gains from shares of companies whose property consists directly or indirectly principally of immovable property situated in India. India has complete taxing rights over such transactions.
Business Property Connected to a PE (Article 14(2))
Gains from the alienation of movable property forming part of the business property of a permanent establishment that a Spanish enterprise has in India, or movable property pertaining to a fixed base for independent personal services, may be taxed in India. This includes gains from the alienation of the PE or fixed base itself.
Ships and Aircraft (Article 14(3))
Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to their operation, are taxable only in the state where the enterprise's place of effective management is situated.
Shares with 10%+ Participation (Article 14(5))
Gains from the alienation of shares forming part of a participation of at least 10% in a company resident in India may be taxed in India. India applies its full domestic capital gains rates:
| Asset Type | Holding Period for LTCG | STCG Rate | LTCG Rate |
|---|---|---|---|
| Listed equity shares (Indian) | 12 months | 20% (Section 111A) | 12.5% above INR 1.25 lakh (Section 112A) |
| Unlisted shares | 24 months | Slab rate (non-resident: 30%+) | 12.5% (Section 112) |
| Immovable property | 24 months | Slab rate | 12.5% (Section 112) |
| Debt mutual funds | 24 months | Slab rate | 12.5% (Section 112) |
Shares Below 10% Participation (Article 14(6))
Gains from the alienation of shares where the Spanish investor holds less than 10% of the company, and gains from any other property not covered in preceding paragraphs, are taxable only in Spain. This is a significant treaty benefit for Spanish portfolio investors with minority holdings in Indian companies.
Who Qualifies for the 10% Threshold Benefit
The 10% participation threshold under Article 14(5) creates a clear dividing line for Spanish investors:
Portfolio Investors (Below 10%)
Spanish portfolio investors — including mutual funds, pension funds, insurance companies, and individual investors — who hold less than 10% of an Indian company's shares benefit from complete exemption from Indian capital gains tax. This makes Spain one of the more favourable treaty jurisdictions for passive Indian equity investments. The Spanish investor must establish treaty eligibility through a Tax Residency Certificate and Form 10F.
Strategic Investors (10% or More)
Spanish strategic investors, private equity funds, or corporate entities holding 10% or more face full Indian domestic capital gains tax. Relief from double taxation is available through the foreign tax credit mechanism in Spain.
Controlling Interest Test — Mumbai ITAT Precedent
In a significant ruling, the Mumbai ITAT held that the absence of a controlling interest renders the sale of shares by a Spanish entity not taxable in India under the India-Spain DTAA. The tribunal examined whether the assets of the Indian company "principally" consisted of immovable property and concluded that merely being engaged in real estate development does not automatically mean the company's assets principally consist of immovable properties. This precedent provides comfort to Spanish investors in Indian companies with diversified assets.
MLI and Principal Purpose Test
The MLI's Principal Purpose Test (PPT) now applies to this treaty. Indian tax authorities can deny treaty benefits — including the 10% threshold exemption — if they determine that one of the principal purposes of an arrangement was to obtain the benefit. Spanish investors who restructure their holdings specifically to stay below 10% may face PPT challenges.
Capital Gains-Specific Treaty Provisions
Immovable Property Companies — The "Principally" Test
Article 14(1) extends India's taxing rights to gains from shares of companies whose property consists "principally" of immovable property in India. The interpretation of "principally" — whether it means more than 50%, more than a substantial portion, or a predominant portion — has been litigated. The Mumbai ITAT has taken the view that "principally" requires the assets to be predominantly immovable property, not merely substantially.
No Treaty Rate Cap
Where India has the right to tax capital gains (i.e., for holdings of 10%+ or immovable property), the treaty does not impose any cap on the tax rate. India applies its full domestic rates without limitation.
Credit Method for Double Taxation Relief
Spain provides relief from double taxation through the credit method. Spanish residents who pay capital gains tax in India claim a credit against their Spanish tax liability for the Indian tax paid. The credit is limited to the Spanish tax attributable to the Indian-source income.
MLI Synthesised Text
The India-Spain DTAA has an official synthesised text incorporating MLI modifications. The synthesised text was prepared based on India's MLI ratification (25 June 2019) and Spain's ratification (28 September 2021). Key MLI provisions incorporated include the preamble language on preventing tax avoidance, the Principal Purpose Test, and modifications to the mutual agreement procedure.
Documentation Required
Spanish investors must maintain the following documentation for capital gains transactions involving Indian assets:
Tax Residency Certificate (TRC)
A Tax Residency Certificate from the Spanish tax authorities (Agencia Tributaria) is critical, especially for investors claiming the sub-10% exemption. The TRC establishes the investor's residence in Spain for treaty purposes.
Form 10F
The Spanish resident must furnish Form 10F on India's Income Tax e-filing portal, providing details of status, nationality, Spanish NIF (Número de Identificación Fiscal), and period of residential status.
Self-Declaration of Shareholding
For investors claiming the sub-10% exemption, a self-declaration confirming that the shareholding is below 10% of the Indian company's shares is essential. Supporting documentation such as share certificates, demat statements, and company records may be required.
Form 15CA and Form 15CB
When sale proceeds are remitted from India to Spain, Form 15CA (declaration of remittance) and Form 15CB (CA certificate) must be filed for remittances exceeding INR 5 lakh.
Withholding Procedure for Indian Payers
Indian entities making payments to Spanish residents on account of capital gains must comply with TDS obligations under Section 195:
TDS on Share Transactions — 10% or More Holding
Where the Spanish seller holds 10% or more of the Indian company, TDS applies at domestic capital gains rates:
- LTCG on listed shares: 12.5% (Section 112A)
- LTCG on unlisted shares: 12.5% (Section 112)
- STCG on listed shares: 20% (Section 111A)
- STCG on unlisted shares: Applicable slab rate
TDS on Share Transactions — Below 10% Holding
Where the Spanish seller holds less than 10%, no TDS should be deducted if the seller provides a valid TRC, Form 10F, and self-declaration establishing that the shareholding is below the treaty threshold. Indian payers should obtain and verify these documents before processing payments without TDS.
Section 197 Lower Deduction Certificate
The Spanish seller can apply for a lower deduction certificate under Section 197 if the actual tax liability is expected to be lower than the TDS rate.
Common Disputes and Judicial Precedents
Mumbai ITAT — Real Estate Company Shares
The Mumbai ITAT ruled that merely because companies are engaged in real estate development, it could not be concluded that their assets "principally" consist of immovable properties. Capital gains earned by a Spanish entity on the sale of shares of such companies were held not taxable under Article 14 of the India-Spain DTAA. This is an important precedent for Spanish investors in Indian real estate companies.
Hedging Gains — Articles 7, 14, and 23
In another significant case, the tribunal examined whether gains from hedging transactions were covered under Article 7 (business profits) or Article 14 (capital gains). The tribunal held that although the gains were covered under those articles, they were not taxable under them (as no PE existed), and Article 23 (other income) was not applicable as a residuary provision. This clarifies the treatment of derivative and hedging gains for Spanish investors.
GAAR Implications
India's General Anti-Avoidance Rule (GAAR) can override treaty benefits where arrangements are found to have been entered into primarily for obtaining a tax benefit. Spanish investors who restructure holdings to stay below the 10% threshold may face GAAR challenges if the restructuring lacks commercial substance beyond tax savings.
Indirect Transfers and Section 9(1)(i)
India's indirect transfer provisions under Section 9(1)(i) Explanation 5 can apply to Spanish investors selling shares of intermediary companies that derive value from Indian assets. The treaty's immovable property provision (Article 14(1)) partially overlaps with this domestic law, but the scope of Section 9(1)(i) is broader.
Practical Examples and Calculations
Example 1: Spanish Fund Holding 4% in Indian Listed Company (Below Threshold)
A Spanish pension fund holds 4% of an Indian listed company, acquired for INR 10,00,00,000. The shares are sold after 18 months for INR 18,00,00,000.
- Shareholding: 4% — below the 10% threshold
- Treaty treatment: Gains taxable only in Spain under Article 14(6)
- Indian tax: NIL — no TDS applicable
- Spain treatment: Gain of INR 8,00,00,000 (converted to EUR) taxed under Spanish domestic capital gains law
Example 2: Spanish Company Holding 15% in Indian Company (Above Threshold)
A Spanish multinational holds 15% of an Indian subsidiary, acquired for INR 30,00,00,000. The shares are sold after 36 months for INR 55,00,00,000.
- Shareholding: 15% — above the 10% threshold
- Capital gain: INR 25,00,00,000
- Classification: Long-term (held more than 24 months for unlisted shares)
- Tax in India: 12.5% of INR 25,00,00,000 = INR 3,12,50,000
- Spain treatment: Gain also reportable in Spain; foreign tax credit of INR 3,12,50,000 (converted to EUR) claimed against Spanish tax
Example 3: Spanish National Selling Indian Property
A Spanish national sells an apartment in Goa purchased in 2020 for INR 80,00,000, sold in 2026 for INR 1,40,00,000.
- Capital gain: INR 1,40,00,000 - INR 80,00,000 = INR 60,00,000
- Classification: Long-term (held more than 24 months)
- Tax in India: 12.5% of INR 60,00,000 = INR 7,50,000
- TDS deducted by buyer: 12.5% under Section 195
- Spain treatment: Gain reported in Spain; credit for Indian tax claimed
Frequently Asked Questions
Does the India-Spain DTAA exempt portfolio investors from Indian capital gains tax?
Yes. Under Article 14(5) and 14(6), gains from the alienation of shares where the Spanish investor holds less than 10% participation in the Indian company are taxable only in Spain. This effectively exempts Spanish portfolio investors with minority holdings from Indian capital gains tax.
What is the 10% participation threshold?
Article 14(5) provides that gains from shares forming part of a participation of at least 10% in an Indian-resident company may be taxed in India. Below 10%, gains are taxable only in Spain. The threshold is measured against the total share capital of the Indian company.
How does a Spanish strategic investor avoid double taxation?
A Spanish investor holding 10% or more pays capital gains tax in India at domestic rates and then claims a foreign tax credit in Spain against their Spanish tax liability on the same income. Spain uses the credit method to eliminate double taxation.
Does the MLI affect capital gains under this treaty?
Yes. Both India and Spain have ratified the MLI, which has been in force since 1 October 2019 (India) and 1 January 2022 (Spain). The Principal Purpose Test (PPT) applies, meaning India can deny treaty benefits if the primary purpose of an arrangement is to obtain tax advantages, including structuring holdings below the 10% threshold.
What is the LTCG rate for Spanish investors in India?
For holdings of 10% or more, Spanish investors pay 12.5% LTCG on listed equity shares (above INR 1.25 lakh) and 12.5% on unlisted shares and immovable property. These are the full domestic rates — the treaty does not cap them.
Are immovable property gains always taxable in India?
Yes. Under Article 14(1), gains from immovable property situated in India and shares in companies whose assets principally consist of Indian immovable property may always be taxed in India, regardless of the investor's shareholding percentage.
Can a Spanish investor apply for a lower TDS certificate?
Yes. Under Section 197, a non-resident can apply for a lower deduction certificate if the actual tax liability is expected to be lower than the TDS rate. For investors below the 10% threshold, a nil withholding order can be obtained.
Spain — Dividend Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Beneficial owner of dividends is a resident of the other contracting state; flat rate with no preferential rate for substantial holdings | 15% | 20% + surcharge + 4% cess | Article 11(2) |
Spain — Interest Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Beneficial owner of interest is a resident of the other contracting state | 15% | 20% + surcharge + 4% cess | Article 12(2) |
Spain — Royalty Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Beneficial owner of royalties is a resident of the other contracting state | 10% | 10% + surcharge + 4% cess | Article 13(2) |
Spain — FTS Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Fees for technical services paid to a resident of the other contracting state | 10% | 10% + surcharge + 4% cess | Article 13(2) |