The Spanish Supreme Court, in judgments of December 17 2020 and January 21 2021, reiterated that the fundamental freedom of capital movement had been infringed by the inconsistent tax treatment afforded under Spanish law to certain investors (i.e. investment funds or pension funds) resident in third-party states outside the EU or the EEA compared to resident investors.
The Supreme Court considered whether, as the state attorney petitioned, the application of the case law set out in its previous judgments of November 13 2019 and November 14 2019 (regarding US mutual funds) should depend on whether the non-resident investors could provide evidence that it had not offset the excess tax borne in Spain through a foreign earned income tax credit taken in its country of residence.
After noting that in these cases the freedom of capital movement was infringed on the Spanish side (since Spanish law does not establish a specific procedure for non-resident taxpayers to avoid the restrictions prohibited under EU law), the Supreme Court ruled that:
The potential offset of the excess tax paid in Spain cannot be a determining factor in analysing this infringement, given that what is relevant is the existence of excessive tax in Spain causing discrimination compared to resident taxpayers; and
In any event, the burden of proof as to whether a tax credit was applied on the Spain-taxed income in the fund’s country of residence would fall to the tax authorities, since they are the ones that cited the same and they have access to information exchange mechanisms set out in the respective tax treaty (with the tax treaties being sufficient and suitable).
Accordingly, the Supreme Court confirmed the validity of the criteria maintained to date in connection with investment funds resident in the US, rejecting the argument that this case law should be qualified on the basis of the so-called ‘offset theory’ promoted by the tax authorities in this and other similar cases.
The Supreme Court case law is in line with the Court of Justice of the European Union (CJEU) rulings on taxation of dividends received by non-resident collective investment undertakings, handed down in cases including Amurta (C-379/05), Aberdeen Property (C-303/07), Fidelity Funds (C-480/16), Köln-Aktienfonds Deka (C-156/17), and the leading case FIM Santander (joined cases C 338/11 to C 347/11).
In these cases, the CJEU considered that restriction on the fundamental freedoms established in the Treaty on the Functioning of the European Union should be exclusively examined in light of the laws of the infringing state and, consequently, the existence of a tax treaty cannot be used to justify such restriction.
These new judgments have placed non-resident collective investment undertakings that wish to recover the excess tax paid in Spain (that is, above and beyond what a tax resident would pay) on more solid footing.
Accordingly, collective investment undertakings from third-party countries (such as the US, Canada, Japan, Korea, Australia, Brazil and Switzerland) that have invested in Spain would do well to review their tax situation in order to initiate refund procedures.
Álvaro de la Cueva
Partner, Garrigues
E: alvaro.de.la.cueva@garrigues.com
Salvador Pastoriza
Senior associate, Garrigues
E: salvador.pastoriza@garrigues.com
