Spanish dividend withholding tax violates free movement of capital and must be refunded, says Spanish Supreme Court


On 17 December, 2020, the Spanish Supreme Court ruled that Spanish dividend withholding tax levied from Teachers’ Pension Plan (“TPP”), a Canadian tax exempt pension fund, violates the free movement of capital as laid down in the EU Treaty, and must be refunded. Spanish pension funds are exempt from Spanish tax on dividends from Spanish source. Not extending this favorable tax treatment to non-resident pension funds who are objectively comparable with Spanish pension plan is a prohibited discrimination that violates the free movement of capital.

TPP had submitted requests for refund of Spanish dividend tax withheld from portfolio dividends it received from Spanish companies in the years 2007 through 2010. The Spanish domestic dividend withholding tax rate was reduced at source to 15% uder the Canadian – Spanish double tax treaty. However, the treaty did not – in that period – provide for full exemption (or refund) of dividend withholding tax to pension funds. Consequently, TPP based its claim on the position that levying the tax – while fully exempting Spanish pension funds in similar situations – violates the free movement of capital as laid down in article 63 of the EU Treaty (which supersedes domestic tax laws and tax treaties of EU member states). TPP was able to do so because the free movement of capital is the only one of the “fundamental freedoms” of the EU Treaty that has effect towards third countries (non-EU member states, like Canada). Under the EU Treaty, all restrictions of the free movement of capital (which includes taxes) are in principle prohibited. They may be justified only if the cross border situation is not objectively comparable with the purely domestic sitation (or in case of overriding reasons in the public interest, which were not present in this case). However, TPP had very thoroughly argued why it was objectively comparable with Spanish pension funds and, consequently, why the violation of the free movement of capital could not be justified.

The Spanish Supreme Court acknowledged that and agreed with TPP’s position. Against the position of the Spanish tax authorities that they were unable to obtain the relevant information to ascertain whether TPP was indeed objectively comparable with Spanish pension funds, the Supreme Court held that the tax treaty provides for an exchange of information provision that meets the OECD standards. If the Spanish tax authorities had any doubt as to the objective comparability they should have contacted the Canadian Revenue Authority under this provision to request the requisite information or documentation.

This judgment is in line with the European Court of Justice’s prejudicial ruling in the College Pension Plan case (dated 13 November 2019; to read our analysis of this ruling click here). Furthermore, the Spanish supreme court had already ruled in favor of non-resident investment funds before in similar cases. From that perspective, this judgment is not unexpected. However, it is still very important to see highest level national courts of EU member states confirming the applicability of that ruling to their dividend withholding tax legislation.

Pension funds that receive portfolio dividends from Spain and that are tax resident in a country which does not have a tax treaty with Spain or which treaty does not fully exempt pension funds from dividend withholding tax should consider filing similar claims based on the free movement of capital. Under the Spanish statute of limitations, claims as far back as 2017 can still be submitted until 21 April, 2021.

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