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Tax e-Lert - Spanish Court Orders Refund Withholding Tax

Spanish judicial court orders refund of unduly withheld dividend withholding tax to 3 Dutch pension funds in Spain

The Spanish Audencia Nacional national judicial court (equivalent to court of appeal) has delivered a judgment regarding withholding taxes levied on foreign pension schemes in Spain. Three Dutch pension schemes (ABP, PGGM and MN Services), had brought a joint action before the court due to the fact that the Spanish dividends distributed to them were subject to a 15% withholding tax, whereas Spanish pension funds are not subject tax under Spanish Corporate Income Tax Law.

The claimants argued that the tax treatment suffered by them as foreign pension schemes in Spain was discriminatory under EU Law. Claimants stressed that the Spanish tax law was discriminatory on the grounds of nationality as well as violating one of the four main principles of EU Law, namely the free movement of capital (Art. 63 TFEU). Claimants also based their arguments on the primacy of EU Law over national law.

The Spanish Audencia Nacional has now concluded that the Spanish Tax Authorities (STA) should not have levied withholding tax on the dividends distributed to the Dutch pension funds and the STA will therefore have to refund the amounts withheld to the pension funds. Moreover, the court has confirmed that the Spanish regulations have been discriminatory in the past against foreign European pension funds in Spain. It argues that this discriminatory treatment has led to a differentiated tax treatment between resident and non-resident entities and this in turn, has violated the EU principle of the free movement of capital.

It is important to note that as a result of this judgment, it is confirmed that Spain is now one of the jurisdictions where companies may obtain a refund when they have been treated in a discriminatory manner under EU Law and are subject to greater tax burdens than local entities, provided the pension funds have made appropriate claims within the relevant time limits. The appeal court judgment is however likely to be appealed by the STA at the supreme court. In principle, the judgment only refers to pension funds but the court decision may apply for other investment vehicles such us UCITS as well provided that the court refers to the change of law in Spain per 3 March 2010 which says that foreign pension funds and UCITS are subject to Spanish withholding tax but exempt from taxation on dividends and capital gains (with retroactive effect to 1 January 2010).

Spain, thus, follows the line of thought established in ECJ cases such as Fokus Bank. EU/EEE pension funds are advised to file protective claims. They may still need to litigate in order to obtain a refund in Spain. Late payment interest will be accrued.

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