Spain: Withholding Tax on Dividends
A UK-resident company (Co1) received dividends from a Spanish-resident company (Co2). The basic withholding tax rate was 19% (as applied to dividends paid to Spanish residents), which was subsequently reduced to 10% in accordance with the provisions of the Spain–UK Double Taxation Treaty.
Co1’s claim to the tax authority: to refund the tax paid due to losses incurred in the tax year.
The claimant asserts that the taxation system in Spain results in discrimination: resident companies receive a refund of withholding tax where they incur losses, whereas non-resident companies do not. Since the tax applicable to non-residents is considered final, there is no mechanism for its refund in the event of losses, which, according to the claimant, infringes the principle of the free movement of capital under Article 63 TFEU.
Position of the tax authority
The refusal to refund withholding tax to non-residents is justified and does not infringe EU principles, as the tax is applied at the same rate to both residents and non-residents. The court also referred to Article 65 TFEU, stating that the difference is based on legitimate objectives: preventing tax evasion, ensuring a fair allocation of taxing rights between Member States, and maintaining the coherence of the tax system.
As a result, the court held that Article 63 of the Treaty on the Functioning of the EU (TFEU), which guarantees the free movement of capital, prohibits tax rules whereby:
- a resident company receives a refund of withholding tax where it incurs losses during the tax year;
- whereas a non-resident company in a comparable situation does not receive such a refund.
This difference was found to constitute a breach of the free movement of capital.
Accordingly, such cases illustrate that EU Member States seek to ensure equal tax treatment for residents and non-residents in order to attract foreign investment. The court protects the principle of the free movement of capital, meaning that companies should not suffer discrimination solely on the basis of their tax residence. This forms part of a broader strategy to create an attractive investment climate.
Author: Yaroslavna Zadesenskaya
Contact our lawyer for more details
Write to lawyerAttention Journalists: Use of REVERA website materials in publications is only allowed with our written permission.
