The Spanish Central Economic Administrative Court issued two resolutions in October 2019 regarding the concept of beneficial ownership.
The background of the first case is a Spanish entity paying interest to its Dutch holding, which is controlled by an entity located on the Caribbean Island of Curacao, which in turn is controlled by an entity of Andorra, owned by a person that is also resident in Andorra. Article 14.1.c) of the Non-Resident Income Tax Law establishes that residents in another EU state are exempt from Non-Resident Income Tax. Therefore, the Spanish entity did not withhold tax. However, the Spanish Tax Authorities considered that, since the beneficial owner was not resident in an EU Member State, this exemption could not be applied. In particular, the tax authorities based their decision on the application of Directive 2003/49/CE related to payments of interests and royalties between entities of different Member States, which includes the concept of the “beneficial owner”.
This interpretation was not shared by the entities, who filed a claim against the Spanish Tax Authorities’ resolution arguing that the clause of beneficial ownership is not foreseen by the Non-Resident Income Tax Law in these cases. Therefore, considering that the beneficial ownership is not specifically regulated in the Spanish national law, it cannot be applied through a Directive that has not been transposed.
Nevertheless, the Central Economic Administrative Court agreed with the criteria applied by the Spanish Tax Authorities and concluded that, in accordance with the criteria established by the EU Court of Justice in “The Danish cases”, the clause of beneficial ownership established by the directive is a valid legal source in relation to the purposes of the EU policies. Consequently, as the EU regulation sets up the prohibition of abusive practices, such clause should be applicable even when the directive has not been transposed.
In a comparable context, the Central Economic Administrative Court issued a second resolution about a case where the Spanish Tax Authorities had denied the application of the exemption of Non-Resident Income Tax to a non-resident entity (here: resident in Luxembourg) that had received dividends from its Spanish subsidiary pleading the clause of beneficial ownership. In particular, the Spanish Tax Authorities considered that, as the beneficial owner of the Luxembourg entity was tax resident in Qatar, the exemption established by the Non-Resident Income Tax for the dividends paid to entities resident in an EU Member State was not applicable.
In this regard, it is important to bear in mind that, regarding the payment of dividends, the Non-Resident Income Tax does set out an anti-abuse clause, which states that the exemption does not apply when most of the voting rights of the parent company are owned by a non-EU resident person or entity. According to the wording of the Non-Resident Income Tax Law in force in 2012, the anti-abuse clause cannot be applied if the parent company can prove any of the three following circumstances:
In the case at hand, the Central Economic Administrative Court not only concluded that none of the three aforementioned circumstances had been proved but also that the Luxembourg parent entity had been set up for the sole reason of taking advantage of the tax exemption. Consequently, the court considered that the Spanish entity was obliged to withhold the Non-Resident Income Tax, regardless of the fact that the Directive 90/435/CEE – parent subsidiary directive – does not foresee such clause of beneficial ownership. In this sense, the Court considered that the application of the anti-abuse clause could not mean a wrong transposition of the Directive as their criteria was following the EU principles, despite the impact that this could have on the European Union rights such freedom of movement and establishment.
Contrary to the criteria applied by the Central Economic Administrative Court in its resolutions of 8th October 2019, the Supreme Court has recently ruled a case stating a different approach on the application of the beneficial ownership.
In this case, the Spanish Tax Authorities had denied the application of the exemption on the payment of royalties between entities resident in Switzerland and Spain (established in article 12 of the Double Taxation Agreement between Switzerland and Spain) arguing that the beneficial owner is not the Swiss parent company but is actually the shareholder of the Swiss entity which is resident in another country.
According to the Supreme Court, the main issue is to determine whether the clause of beneficial ownership is applicable despite the fact that the Double Taxation Agreement (hereinafter: “DTA”) does not expressly set out such anti-abuse rule. In this regard, it should be highlighted that none of the revisions of the DTA between Switzerland and Spain has ever included such clause when it refers to the payment of royalties, while other articles of the DTA – related to payment of interests and dividends – have. However, the Spanish Tax Authorities considered that the limitation of the beneficial ownership could be inherent in the interpretation of the DTA within the principles of the EU tax regulations and would be aligned with the Comments published regarding the OECD Model Convention, which are considered soft law.
In this sense, the Supreme Court states that soft law is an instrument that can help to interpret the regulation, but cannot be used to extend the scope of the regulation if such regulation does not expressly rule on certain matter. For this reason, if the DTA between Switzerland and Spain does not set out the clause of beneficial ownership on the payment of royalties, the clause cannot prevail due to the Comments on the OECD Model Convention and the dynamic interpretation of the treaties. Moreover, the Spanish Tax Authorities should have taken into account that such anti-abuse clause could lead to a double taxation if the income was also taxed in Switzerland, contrary to the main purpose of the treaty.
Consequently, the Supreme Court rules that the beneficial ownership cannot be applied, if it is not expressly included in the wording of the applicable law.
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