On December 19th 2024, the CJEU found that withholding tax rules in Biscay, an autonomous tax region in Spain, are incompatible with Article 63 of the Treaty on the Functioning of the European Union (“TFEU”), guaranteeing the free movement of capital.  

The case concerns Credit Suisse, a UK resident company with no permanent establishment in Spain, which recorded a tax loss position in the UK. In 2017, Credit Suisse received dividend income from a company in Biscay, where it held a shareholding of less than 5%. The dividend income was subject to a 10% withholding tax rate, based on the UK-Spain double tax treaty (DTT).  

According to Biscay tax legislation, a Spanish company recording a loss on the corporate income tax base is eligible to request a full refund of Spanish withholding tax incurred in that year, since there is no tax liability against which the withholding tax (which service as an advance levy to the corporate income tax) can be credited. 

Credit Suisse recorded losses in the UK in 2017 and was unable to refund the Biscay withheld tax amount, because the provincial law was designed to be a definitive tax with no method of reimbursement in the event of losses. However, for a resident company in Biscay subject to withholding tax and paying corporate income tax, the withheld amount constitutes a payment on account of that tax and only gives rise to a levying of tax if that company recorded a positive tax base. If the resident company recorded a negative tax base, the withheld tax amount would be refunded. Thus, Credit Suisse argued that this difference in treatment between resident and non-resident companies was discriminatory and constituted a restriction of the free movement of capital.  

Credit Suisse brought the matter before the High Court of Justice of the Basque Country, which stayed proceedings and referred the case to the CJEU. 

CJEU Ruling

The CJEU ruled in favour of Credit Suisse. The court found Biscay tax rules provided an advantage to Biscay resident companies in a tax loss position, that is denied to non-residents in a similar position. This unequal treatment created a cash-flow disadvantage for non-residents, effectively penalizing cross-border investment. 

The Court concluded that Article 63 TFEU precludes national rules in a Member State that impose a withholding tax on dividends distributed by a company established in a (fiscally autonomous territory of that) Member State, where such rules allow for a refund of the withholding tax to resident companies in a tax loss position but deny the same right to non-resident companies in a tax loss position. The CJEU determined that this disparity constitutes a restriction on the free movement of capital prohibited under Article 63 TFEU. The Court found justifications presented by the Provincial Council of Biscay, including the need to ensure effective tax collection and the allocation of taxation powers, insufficient to render the restriction lawful. 

The Court relied on the reasoning in Sofina (C-575/17) to reach its conclusion. 

• Firstly, the Biscay Provincial Law excludes an advantage (the ability to offset a tax loss position) for non-residents in cross-border situations, whereas this advantage is granted in equivalent national situations, thereby restricting the free movement of capital. 

• Secondly, when assessing whether there is less favorable treatment of dividends paid to non-resident companies, the relevant tax year must be considered. Specifically, the financial year in which the dividends are distributed serves as the basis for comparing the tax burden on residents versus non-residents. For loss-making resident companies, this burden is effectively nil due to the possibility of reimbursement, while non-residents remain subject to definitive taxation. 

• Lastly, the Biscay Provincial rules confer a distinct advantage on loss-making resident companies by providing them, at the very least, with a cash-flow benefit or even a full exemption. By contrast, non-resident companies face an immediate and final tax obligation in Biscay, irrespective of their financial situation.

Additions and Clarifications in the Credit Suisse Judgment 

The Credit Suisse judgment deals with a fiscally autonomous region (Biscay, Spain) and addresses whether local rules comply with EU law. It adds a dimension of regional tax authority interaction with EU principles, which is less emphasized in Sofina. 

While Sofina discusses bilateral tax treaties in general terms, Credit Suisse specifically references the Hispano-British Tax Convention and explores its interaction with EU law, especially when such conventions fail to remedy discriminatory practices. 

The Credit Suisse judgment delves deeper into the mechanics of tax deferral, emphasizing how the lack of deferral for non-resident entities leads to immediate and definitive taxation. It also considers how these rules could enable double-use of losses and whether this is a legitimate justification. 

The judgment builds on Sofina by further addressing how mutual assistance mechanisms between Member States can mitigate enforcement challenges, making discrimination harder to justify. 

The Credit Suisse judgment incorporates additional case law (e.g., ACC Silicones) and applies them to reinforce its findings, adding depth to the argument that non-reimbursement constitutes discrimination. 

After finding that the Biscay tax rules in question impeded the free movement of capital, the Court considered whether this restriction was justified based on objective comparability and upholding public interest. The Court found neither justification to be applicable.  

As a result, non-resident investors in Spain who have faced similar discriminatory tax treatment over the years may now have grounds to seek refunds for withheld taxes. This ruling could have significant implications for non-resident investors in Spain and across other EU Member States, particularly in cases where withholding tax rules create an unequal burden by favoring resident investors over their non-resident counterparts. 

To read the full judgement, click here.