This content is from: Spain

Discrimination on taxation of outbound dividends

Last January 22, the European Commission decided to refer Spain to the European Court of Justice (ECJ) over discriminatory taxation of outbound dividends.

Antonio Matute

Such a referral may have opened an opportunity for companies which have been subject to Spanish withholding tax on dividends paid by their Spanish subsidiaries. Specifically, it could apply to parent companies of Spanish subsidiaries, resident in another EU member state, or an EFTA state (Iceland, Liechtenstein, Switzerland and Norway), which have received Spanish sourced dividends, subject to Spanish withholding tax, in the last four years. Four years is the limit to claim for the refund of taxes under Spanish law.

The issue is quite simple. Under Spanish tax law, domestic dividends (that is, dividends paid by a resident subsidiary to a resident parent company) are not subject to withholding tax, and the parent company is exempt of tax on those dividends, provided that it has a holding of at least 5% for at least one year.

By contrast, outbound dividends (that is, dividends paid by a resident company to a non-resident parent company) are, in principle, subject to a withholding tax at a rate of 18% and the parent company is not granted any exemption on such withholding tax. Where the parent company is resident in another member state, outbound dividends are exempt as long as the requirements provided by the domestic implementation of the Parent-Subsidiary Directive are fulfilled, the most relevant of which being that the parent company must have a direct holding of at least 15%.

The following table outlines the taxation applicable to domestic and outbound dividends according to Spanish domestic tax law:

Table 1: Outbound dividend flow
Holding in the Spanish subsidiaryDomestic


To residents in EUTo residents out of EU (including EEA countries)
Below 5%16.25% 218% 318% 3
Over 5%, but below 15% 118% 318% 318% 3
Over 15% 118% 3Exempt 418% 3
1. 25% until 2005; 20% in 2006
2. 17.5% until 2006
3. 15% until 2006
4. The holding must be direct to qualify for the exemption

In this situation the Commission understood that the Spanish rules under which certain outbound dividends may be taxed more heavily than domestic dividends are contrary to the EC Treaty and the EEA Agreement because they may restrict both the free movement of capital and the freedom of establishment. As shown in the above table this would be the case, for instance, of dividends paid to an EU parent company with a holding of between 5% and 15%.

The Commission sent a Reasoned Opinion to Spain, to request it to amend the legislation at issue. Spain's reply was negative, so last January 22 the Commission decided to refer Spain to the ECJ as the final stage of the infringement procedure under Article 226 of the EC Treaty.

Although it is not easy to predict the exact content of the ECJ decision, there are two well known recent precedents concerning tax treatment of outbound dividends that might give some clues on the possible direction of the Court's decision: the Fokus Bank case (Case E-1/04) and the Denkavit case (Case C-170/05). In both, the competent Courts (EFTA Court and ECJ, respectively) concluded that domestic tax laws should have provided shareholders residing in other EEA/EU states with the same tax benefits (such as exemptions) on the taxation of outbound dividends as those available for residents receiving domestic dividends.

From a practical standpoint, if the ECJ follows the path of the mentioned precedent, this issue might open an opportunity for those parent companies resident in another EU member state or EEA state that have suffered a potentially discriminatory withholding tax in Spain within the last four years.

In this respect, it would be advisable to file now protective claims, in order to stop the clock of the statute of limitations, and wait for a likely favourable ECJ decision that could allow for the refund of any excess Spanish withholding tax paid on outbound dividends.

Antonio Matute (, Bilbao

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