Luxembourg investment fund entitled to Spanish dividend withholding tax refund based on free movement of capital.

The Spanish National High Court recently published its decision that a Luxembourg collective investment fund (Fidelity) is entitled to a refund of Spanish dividend withholding tax imposed on dividend income derived from its investments in Spain.

In Spain, Spanish collective investment vehicles that comply with the EU directive (2009/65/EC) on the coordination of UCITS (undertakings for collective investment in transferable securities) are eligible for a 1% dividend withholding tax rate. Fidelity, however, a Luxembourg based UCITS was subject to the much higher Spanish statutory dividend withholding tax rate, reduced under the tax treaty to  15% which is much higher than the 1% Spanish UCITS are subjected to.

Fidelity filed requests for refund of the difference between the rate withheld from it and the 1% rate applicable to Spanish UCITS over the years 2006-2009, arguing that its different tax treatment compared to Spanish UCITS violates the free movement of capital as laid down in article 63 of the EU Treaty. Article 63 of the EU treaty states that “all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited”.

After no response from the Spanish tax authorities, Fidelity brought its claim to court. Before the court, the Spanish tax authorities argued that the effect of the potential violation was neutralized by the assumption that the Spanish tax would be neutralized by a tax credit granted to Fidelity in Luxembourg.  The Spanish national high court ruled that indeed there is a violation of the free movement of capital and that the burden of proof that the violation is neutralized is on the Spanish tax authorities. Since the Spanish tax authorities only asserted the neutralization but did not demonstrate it, much less prove it, the violation could not be justified. Accordingly, the Spanish national high court ordered the Spanish tax authorities to refund the dividend withholding tax to Fidelity.

Impact

This decision fits in a series of favorable developments in the interpretation of the Spanish tax legislation in light of the TFEU , especially with respect to the free movement of
capital, in the area of reclaims filed by non-Spanish investors.

The decision can be found by clicking here.