Peter is British, has lived in Málaga since 2021 and is tax resident in Spain. He holds foreign shares through a broker in another country. In 2026 he receives 8,000 euros gross in dividends from a company in a country whose treaty with Spain limits source withholding on dividends to 15%; but because nobody filed the residence form with the broker, 30% has been withheld: 2,400 euros. He also receives 2,000 euros of interest on a Spanish account. When he prepares his return, he wonders whether he can take the 2,400 euros off what he pays here. He can take off part of it, and probably not all.
The mechanism is the foreign tax credit in article 80 of the Spanish Personal Income Tax Act (IRPF). As a resident, Peter is taxed in Spain on his worldwide income, foreign dividends included. The credit prevents him from paying twice on the same income, but with a limit that is worth understanding before filing.
The lower of two amounts
Where a taxpayer's income includes returns or gains obtained and taxed abroad, article 80.1 allows a deduction of the lower of these two amounts:
| Amount | What it is |
|---|---|
| a) What was paid abroad | The amount actually paid abroad, on that income, under a tax identical or similar to IRPF or to Spanish non-resident income tax |
| b) What Spain would charge | The effective average tax rate applied to the part of the taxable base taxed abroad |
Paragraph 2 defines the effective average rate: the total net tax liability divided by the taxable base, multiplied by 100 and expressed to two decimal places, calculated separately for the general base and for the savings base. A foreign dividend is compared with the average savings rate; rent from a flat abroad, with the general one.
Peter's case, figure by figure
We assume the personal allowance is used up in the general base and there are no other credits.
- Savings base: 8,000 of dividends + 2,000 of interest = 10,000 euros.
- Savings tax, State plus regional scale: 6,000 × 19% = 1,140; 4,000 × 21% = 840. Total, 1,980 euros.
- Effective average savings rate: 1,980 / 10,000 × 100 = 19.80%.
- Limit b), what Spain charges on the dividend: 8,000 × 19.80% = 1,584 euros.
- Amount a), withheld abroad: 2,400 euros.
- Looking at article 80 alone, the lower figure would be deducted: 1,584 euros.
Even then, the 816-euro difference would not be recovered on the Spanish return, and the IRPF Act makes no provision for carrying it forward to later years. But Peter's problem starts earlier, with amount a): not everything withheld counts as creditable tax.
The treaty sets a ceiling too
Double taxation treaties usually limit what the source country may withhold, and the credit granted by the country of residence is adjusted to that limit. In Peter's case the treaty allows 15%: 1,200 euros. The other 1,200 withheld in excess is not a tax Spain has to recognise: it is an overpayment to be reclaimed from the source country under its own procedure, which is that country's law and must be confirmed by his adviser there.
| Scenario | Withheld abroad | Article 80 limit | Deducted | Not recovered in Spain |
|---|---|---|---|---|
| Withholding at the treaty rate | 1,200 | 1,584 | 1,200 | 0 |
| 30% withheld, not reclaimed | 2,400 | 1,584 | 1,200 | 1,200, to claim at source |
The practical lesson: paperwork at source comes before the credit. A residence form properly lodged with the broker or paying agent usually gets withholding set at the treaty rate from the start. For that, you need to prove Spanish residence with a tax residence certificate.
When the average rate is lower than the tax paid
Limit b) is a reminder that the credit never reduces what you pay on your other Spanish income. If your savings base is small, your average rate is low, and even with correct withholding at source you may not recover all of it. The same happens with foreign rental income: if the country where the flat is located taxes net rent at a high rate and your Spanish general base that year is modest, the credit is capped by the Spanish average rate.
An example with assumed figures in the general base. A resident of Seville owns a flat in another country that yields 6,000 euros of net rent, on which she pays 1,200 there. Her general taxable base for the year, including her salary, is 40,000 euros and her general net tax liability is 9,000.
- Effective average general rate: 9,000 / 40,000 × 100 = 22.50%.
- Limit b): 6,000 × 22.50% = 1,350 euros.
- Amount a), paid abroad: 1,200 euros.
- The lower is deducted: 1,200 euros. Everything paid abroad is recovered.
If, in the same year, her general base were 15,000 euros and her tax 2,100, the average rate would fall to 14.00%, the limit to 840 euros, and 360 of the euros paid abroad could not be deducted. Same rent, same foreign tax, different result: the limit depends on everything else declared in Spain.
The same arithmetic explains why two people with identical foreign income can end up with different credits: the limit is personal, because it follows each taxpayer's own average rate, and it changes from one year to the next as the rest of their Spanish income changes.
Where there is income from several countries, the prudent approach is to do and keep the calculation income by income, with proof of each tax paid. That is the first thing requested if the credit is reviewed.
Which income and which taxes qualify
- Income: returns or capital gains obtained and taxed abroad. Dividends, interest, rent, gains on selling property located abroad, and pensions or salaries where the treaty lets the source country tax them too.
- Taxes: those identical or similar to IRPF or to Spanish non-resident income tax. A wealth tax, a local charge or a consumption tax does not count.
- Permanent establishment: income earned abroad through a permanent establishment also uses this credit, and not the exemption in article 22 of the Corporate Income Tax Act (art. 80.3).
- Exempt income: if income is exempt in Spain, such as the exempt part of salary for work performed abroad, it is not in the base and generates no credit. That exemption is explained in our guide to article 7.p.
Exchange rates and proof. Tax paid abroad is converted into euros and proved with the payer's statement or the other country's assessment. Without proof, the credit is fragile under review. How the other country treats the same income, whether it taxes it, at what rate and how over-withholding is reclaimed, is foreign law: we do not give opinions on it, and the client's adviser in that country has to confirm it. We cannot guarantee that the tax authority will accept the credit as calculated; we can warn you where it usually goes wrong.
How it sits alongside Modelo 720
The accounts, securities and assets that produce this income are often held outside Spain, and that brings another obligation, separate from the income tax return: the informative return on assets abroad, Modelo 720, when its thresholds per block are exceeded. One does not replace the other: the credit corrects double taxation of income; the 720 reports where your wealth is. The thresholds are explained in our guide to the three blocks of the 720, and company shares in our guide to equity and the 720. Anyone taxed under the special article 93 regime, the Beckham regime, is not required to file the 720.
And if the double taxation arises because two countries each treat you as resident, the credit is not the first step: residence under the treaty has to be settled first, as explained in our guide to dual residence.
Checking the returns for earlier years
It is common to find that foreign dividends were declared in earlier years without applying the credit, or that it was applied for the full amount withheld without the limit. In the first case, a correction can be requested while the right has not become time-barred; in the second, it is better to put it right before the tax authority does. Either way the calculation is the same: the lower of what was paid, within the treaty, and what results from the Spanish average rate.
Where to begin
With your broker's dividend and interest statements, proof of the withholding at source and the year's return, we review each item of foreign income, apply the article 80 limit and point out which part would have to be reclaimed in the source country. If there are also assets abroad to declare, we look at them together. The starting point is our Modelo 720 form, and the full service is on our Modelo 720 page. We review every calculation with care, but what the tax authority decides is not in our hands and we do not guarantee the outcome.
To complete the international picture: the exit tax when you leave Spain, the exemption for work done abroad, controlled foreign company rules and how Spain looks at a trust.