Spotlight on Spanish Alternative Dispute Resolution Procedures: An Underutilised but Highly Effective Tool to Eliminate Double Taxation

What you need to know

• Alternative Dispute Resolution (ADR) mechanisms are dispute resolution procedures between tax administrations, established by international tax treaties, designed to eliminate international double taxation or taxation not otherwise in accordance with tax treaties. These mechanisms typically involve a mutual agreement procedure (MAP) in the first instance and, in some cases, arbitration may follow.
• ADR remains underutilised in Spain, yet these processes offer significant advantages over traditional litigation, including most importantly, high success rates, lower costs, and faster resolution.
• Spain has three ADR frameworks: double tax treaties inspired by Article 25 of the OECD Model Tax Convention, the EU Arbitration Convention (90/436/EEC), and EU Directive 2017/1852.
• The success of ADR in Spain is reflected in OECD statistics, which show that approximately 67% of transfer pricing cases resolved via ADR in 2024 resulted in the full elimination of double taxation.

Why consider ADR?

ADR offers several key advantages over domestic litigation (and this can be seen in other jurisdictions as well as in Spain):

• High effectiveness: ADR has a strong track record in eliminating international double taxation completely.
• Lower costs and simpler process: filing an ADR request is relatively straightforward compared to the complexity of economic-administrative and judicial proceedings in tax matters.
• Compatible with domestic litigation: ADR can run alongside domestic appeals, which are suspended during the procedure, providing a helpful "back up" option in the event ADR is unsuccessful.
• Speed: although timelines vary, ADR often proceeds remarkably quickly. We have experience of seeing the process completed within six months.
• Specialist handling: in Spain, ADRs are handled by subject expert officials, having high levels of expertise in international taxation and transfer pricing.
• Guaranteed resolution where arbitration (second phase) is available: when no serious penalties are imposed, arbitration procedures are available under the above-mentioned EU instruments and specific treaties (e.g., with the USA, UK, Switzerland, and Japan).

Our experience: two recent successful cases

We frequently act for taxpayers in ADR proceedings. Recent successful examples include:

(1) Transfer pricing in intra-group financing

Our client, a Spanish group, had an intra-group financing structure whereby a Dutch subsidiary issued bonds in Luxembourg (guaranteed by the Spanish parent) and on-lent the proceeds to Spain, applying a financial intermediation margin. The Spanish tax authorities denied the deductibility of this margin, considering that the Dutch entity performed merely administrative functions rather than acting as a financial institution, and replaced the comparable uncontrolled price method with the cost-plus method. This created international double taxation, as no corresponding adjustment was made in the Netherlands.

We initiated an ADR under the EU Arbitration Convention. Within approximately six months, the Spanish and Dutch authorities reached an agreement whereby the Netherlands accepted a full downward adjustment of the Dutch entity's income, successfully and entirely eliminating the double taxation burden.

(2) Tax characterisation of NPL portfolio income

A Dutch entity, indirectly held by international investment funds, acquired a portfolio of non-performing loans (NPLs) secured by mortgages over Spanish real estate. The Spanish tax authorities recharacterized the interest income from these NPLs as real estate income (taxable in Spain) rather than interest (exempt under the Spain-Netherlands treaty), arguing that the economic value derived from the mortgage rights over the underlying properties.

We filed an ADR request under the bilateral tax treaty, and the competent authorities of Spain and the Netherlands concluded that the income should be classified as interest within the meaning of Article 11 of the tax treaty, and therefore exempt from taxation in Spain under domestic legislation.

Is ADR right for your case?

ADRs are particularly suited to transfer pricing disputes and cross-border taxation controversies (e.g., recharacterization of income, disputes related to residence for tax purposes, or disputes concerning the existence of a permanent establishment) where the same income risks being taxed in two jurisdictions. They can run in parallel with domestic appeals, which remain suspended while the ADR is pending, offering a pragmatic alternative or complement to litigation.

If your business faces international double taxation arising from a tax assessment, we would be pleased to discuss whether ADR could be an effective solution. Please do not hesitate to contact us.