Spanish Supreme Court confirms right to claim reimbursement of dividend withholding taxes by non EU Funds

8 min read

  • The Spanish Supreme Court has released a relevant decision regarding the taxation in Spain of dividends collected by non resident Investment Funds from Spanish distributing entities in whose capital they participate.
  • The decision confirms that non resident Investment Funds must be treated in Spain for tax purposes, in respect of such dividends, in the same way as Spanish resident Funds, clarifying that, where this is not the case, in accordance with European free movement of capital, said non resident Funds have the right to the reimbursement of any excess withholding taxes borne.
  • The decision impacts not only EU Funds but also, for the first time, those resident in third countries outside the EU.
  • Recently White & Case successfully led before the CJEU a similar decision in connection with certain restrictions imposed by Germany to non resident Pension Funds.


The Issue

  •  The decision of the Spanish Supreme Court dated November, 13 2019 (3023/2018), only recently released, refers to a US resident Investment Fund who participates in several Spanish resident entities.
  • Dividends distributed to said US Fund by its Spanish participated entities were subject to withholding tax at source, at a 15% rate, further to Spain´s non resident income tax legislation in connection with the Spain-US Double Tax Convention.
  • Spanish withholding tax borne by a US Investment Fund generally result in final taxation (cost) it being non-recoverable, neither in Spain under Spanish law, nor in the US by virtue of the Fund being subject tto a special low tax regime in the US derived from the Fund´s role as an agent in channelling private savings to productive activities. Spanish qualifying Funds (so-called Collective Investment Institutions) also enjoy, based on the same rationale, a privileged tax regime which limits its direct taxation in Spain to 1%.
  • According to the Court, all the above results in a discrimination between qualifying Spanish resident Funds (Collective Investment Institutions) and comparable non resident Funds to the extent that the final tax burden of qualifying resident Funds is limited to 1% in Spain given their privileged entitlement to recover any excess dividend withholding taxes borne in Spain.
  • The Spanish Supreme Court believes this discrimination is against the EU free movement of capital and must be corrected, the correction being applicable both to Funds who are resident in the EU and, as the case of the US is, in third States.


The Supreme Court Decision of November 13, 2019

The most relevant aspects of the Decision of reference are the following:

  • Precedents: The Supreme Court bases its decision on its own previous doctrine re EU Investment Institutions, Pension Funds and other Investment Funds and on several decisions of the CJEU.
  • Discrimination: The Supreme Court decision confirms that EU Law (articles 63 through 65 FTEU) is against legislation of a Member State which, as the Spanish, imposes withholding taxes at source on dividends paid by a resident Company, while establishing a credit or reimbursement procedure which is only available to resident taxpayers. Such unrecoverable withholding tax constitutes a definitive tax for non resident taxpayers, thus resulting in a higher tax burden compared to the limited tax to be paid by residents on the same dividends.
  • Tax Distortion: The Supreme Court believes that a tax distortion exists whereby Spanish resident Funds, taxable at 1%, are favoured in respect of comparable non resident Funds which will generally pay taxes at levels between 15% and 19% depending on the specific Double Tax Convention, where applicable. All of it constitutes a differentiated tax treatment which is against article 63 FTEU since it involves a restriction to the EU free movement of capital, with exceptional article 65 FTEU not being applicable. This tax distortion constitutes an originary infringement derived from the fact that the withholding tax is a sui generis figure which, in spite of its denomination, does not have the nature of a prepayment on account of a final tax liability, but constitutes a final tax payable, with any excess amount disbursed being irrecoverable, precisely because the law does not conceive the possibility of an excess.
  • Third Countries: The fact that the Fund is a resident of a third country which is not a EU Member State should not, in the opinión of the Supreme Court, be an obstacle for due application of the EU free movement of capital given that, since the Treaty of Maastricht, restrictions to the movements of capital and to payments between Member States, and in respect of third countries, have been eliminated, with further restrictions of any kind being prohibited, sabe those of an exceptional nature as legally foreseen.
  • Comparability of Investment Funds: For due application of its doctrine the Supreme Court resolves that it is required to dispose of the relevant comparability elements allowing to conclude whether or not a differential treatment exists, not being it sufficient for these purposes to merely consider the Fund´s denomination. Thus, for proper analysis, a verification that, in effect, the non resident Fund is of a comparable nature to that of a qualifying Spanish Collective Investment Institution or EU resident Fund is required. According to the Court claiming that the non resident Fund should be subject to an identical regulation to that applicable to a qualifying Spanish resident Institution would steal all effectiveness to the free movement of capital principle, i.e. absolute identity between non resident and resident institutions, as regulated by Spanish legislation, may not be required, being it sufficient that both types of Institutions are similar or equivalent in accordance with the defining features contained in Directive 2009/65/CE.
  • Proof of Status: The Supreme Court considers that article 27 of the Spain-US Double Tax Convention and article 4 of the OECD´s Multilateral Convention on Mutual Administrative Assistance constitutes the proper framework for Cooperation and Information Exchange for the Spanish tax authorities to verify their requirements and, consequently, to conclude if the necessary similarity with Spanish resident qualifying Funds exists.


Practical Considerations

From a practical standpoint the following considerations may be made:

Reimbursement of withholdings borne

The Supreme Court has confirmed, for the first time, the right of non EU resident Funds to the reimbursement of withholding taxes borne in Spain in excess of the limited (1%) taxation applicable to comparable qualifying Spanish resident Institutions. Affected non resident Funds should approach the Spanish Tax Administration and formally (and timely) claim the reimbursement of said excess withholding taxes paid plus late interest. Filing the related claim is essential in exercising the right recognized by the Supreme Court which, on the other hand, especially notes that any formal requirement attempted to be imposed by the Tax Administration may not be of such demanding nature that it effectively impedes or gravely blocks the obtaining of the refund.

The specific means to prove the tax residence of the Investment Fund in a third country and its comparable qualifying nature will vary depending on the country of residence´s certification practice and on whether or not a Double Tax Convention with Spain is in place. In the specific case of the Supreme Court´s decision of reference concerning a US Fund a Certificate issued by the US Treasury reporting on the tax domicile in the US of the Fund, a Certificate attesting to its condition of registered variable capital Investment Fund subject to due supervisión by the SEC and a reference to the Spain-US Double Tax Convention were deemed sufficient basis for completion of the test by the Spanish Tax Administration.

Where a Double Tax Convention with Spain containing an appropriate Exchange of Information clause is in place the Supreme Court has ruled that such framework is the appropriate one for the Spanish Tax Administration (burden of the proof not on the Fund but on the Administration) to directly contact the US Tax Authorities and verify the related status requisites of the Fund. Where no Double Tax Convention is in place the non resident Fund will need to prove through acceptable means its similarity with relevant qualifying Funds. In both cases, reference to defining features per Directive 2009/65/CE is relevant.

Future Withholdings

Spanish non resident income tax legislation does not regulate a specific procedure to claim the reimbursement of this type of excess withholding taxes borne. Close follow up of future amendments to Spanish legislation enabling such reimbursements will, therefore, be required while, in parallel, ensuring that all the abovementioned certifications are obtained. In the meantime and with the eye on future distributions, sharing in advance the above Court decision as well as the relevant supporting documentation of the Fund´s qualifying status with the Spanish dividend paying participated entities might also be advisable.



The Spanish Supreme Court has opened the door, for the first time, to recovery in Spain by non EU Investment Funds which are comparable to qualifying Spanish resident Investment Institutions, the amount of any withholding taxes borne in excess of the final taxation (at 1%) paid by said resident Institutions. The decision derives from the incompatibility of Spanish law with the EU freedom of movement of capitals. While Spanish legislation still needs to be amended to accommodate the above principle, non EU Investment Funds having paid such excess withholding taxes should focus on duly claiming any reimbursable amount and supporting through the appropriate documentation their status as comparable entities to qualifying Spanish resident Funds.


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