Spanish Supreme Court opens the door to refunds of withholding taxes borne by non-EU pension funds

The Spanish Supreme Court has recently issued a judgment dated on 17 December 2020 which upholds a refund request of the Spanish withholding tax paid by a Canadian pension fund on the basis of a breach of the free movement of capitals principle set forth in Articles 63 and 65 of the Treaty of Functioning of the European Union (“EU”).

Prior to the amendment of the Spanish Non-Residents Income Tax Law in fiscal year 2010, which entered into force for fiscal years beginning on or after 1 January 2011, non-Spanish pension funds where subject to a final withholding tax at the rate of 19% (if not reduced by the corresponding double tax treaty) while the Spanish Corporate Income Tax (“CIT”) rate applicable to Spanish pension funds is 0%.

Following the case law established on a previous ruling relating to a US Regulated Investment Company (RIC) (a collective investment vehicle) published on 13 November 2019, the Spanish Supreme Court accepts that a Canadian pension fund must be able to apply the same tax treatment as Spanish pension funds and obtain the refund of the withholding tax borne in Spain, based on the following:

1. The comparability analysis to determine the existence of a discriminatory treatment must be made in accordance with the domestic legislation applicable to Spanish pension funds. Consequently, the different tax treatment of the dividends received by Canadian pension funds (15% withholding tax rate set forth in the Spain-Canada double tax treaty) compared to the taxation of the dividends paid to Spanish pension funds of analogous characteristics (0% CIT rate provided in the Spanish CIT Law) entails a discrimination on a residence basis because there are no objective elements justifying the referred different tax treatment (such as the general interest).
   The Supreme Court concludes that dividends received by the Canadian pension fund must be exempt from withholding tax given that the Canadian pension fund largely evidenced that it had a similar functioning, structure and governing rules as Spanish pension funds and the failure to comply some of the specific requirements set forth in the domestic legislation applicable to Spanish pension funds does not justify the different tax treatment.
2. The existence of an exchange of information clause in the Spain-Canada double tax treaty should have prevented the discriminatory tax treatment because the procedure established in the tax treaty is a sufficient mechanism to request and obtain the relevant information to determine whether or not Canadian pension funds are comparable to Spanish ones (and pension funds resident in other EU Member States), but the Spanish tax authorities did not issue any request in this regard.

Next steps

Non-EU pension funds and collective investment vehicles should review any withholding taxes borne on distributions made by Spanish companies during the years open to tax audit (i.e. four years in Spain) to evaluate a potential claim to obtain the refund of the withholding taxes paid and the corresponding amount of delay interests.
Further analysis should be made to determine the success of filing a financial liability claim against the Spanish State (responsabilidad patrimonial del Estado) to request the refund of time-barred fiscal years.

Hogan Lovells can provide practical guidance and assistance through the procedure to file a claim to obtain the withholding tax refund. Please contact us for more information on how we can help.

Authored by Alejandro Moscoso del Prado and María Santana