The CJEU judgement of 19 December 2024 (Case C-601/23) has important implications for foreign companies investing in Spain that incur losses in their country of residence and that cannot recover the WHT on the income derived from their investments in Spain, unlike Spanish companies in the same situation. Furthermore, although the case refers to the receiving of dividends, other types of income (e.g. interest or royalties) suffering WHT (at source) could be affected by the CJEU's criteria.
The CJEU recently issued a ruling on whether the different taxation in Bizkaia (a historical territory of the Basque Country with fiscal sovereignty independent from the Spanish State) with regard to dividends distributed by companies domiciled there to companies resident in Spanish territory and to non-resident companies, in a situation of losses, constitutes discriminatory treatment contrary to the Principle of Free Movement of Capital in Article 63 of the TFEU.
The judgement has important implications for foreign companies investing in Spain that incur losses in their country of residence and that cannot recover the withholding tax on the income derived from their investments in Spain, unlike Spanish companies in the same situation. Furthermore, although the case analysed refers to the receiving of dividends, other types of income (interest or royalties) with withholding tax at source could be affected by the CJEU's criteria.
Credit Suisse Securities (Europe), a company resident in the UK, received dividends from a company based in Bizkaia in fiscal year 2017, subject to an initial withholding of 19%, reduced to 10% under the DTA. In that year, it recorded losses, meaning that the withholding could not be recovered in its country of residence. According to the DTA, the tax credit is only recognized in the event of the existence of taxable profits. Thus, the initial withholding became the definitive taxation.
Consequently, it requested a refund of the withholding tax from the Bizkaia tax authorities, alleging discrimination in the taxation of a company resident in Spanish territory. It argued that, despite being subject to the same initial 19% withholding tax, since this was a payment on account of corporate income tax, if the company had incurred losses in that financial year and had no positive tax liability, the withholding tax would have been fully refunded.
In response to the preliminary question raised by the court, the CJEU notes the different tax treatment and, ratifying its previous case law (in particular, the judgement of 22/11/2018, Case C-575/17, Sofina and others), concludes that the difference in tax treatment may discourage non-resident companies from investing in Bizkaia (and by extension, in Spain), which entails a restriction on the free movement of capital.
Conversely, analysing its consolidated case law, the CJEU concluded that such a restriction was not justified (Art. 65 TFEU), as the situations in question were objectively comparable since the State had decided to tax this type of income for both residents and non-residents, and nor was it justified by overriding reasons of public interest.
It understood that tax collection efficiency was not an admissible claim and recalled the need for the non-resident company to provide evidence of its loss-making situation in order to benefit from the refund of withholding tax, as well as highlighting the importance of mutual assistance mechanisms in this regard. It also rejected the argument about the need to preserve the balanced distribution of taxing powers between states and the prevention of the risk of double taxation of losses. Finally, it rejected the claim that the controversial tax regulation guaranteed the maintenance of the coherence of the tax system, as argued by the tax authorities, since resident companies in a loss-making situation obtain a refund of the withholding tax at source and do not have an additional tax levied to compensate for this tax advantage.
For this reason, the CJEU understood that the Bizkaia Non-Resident Income Tax regulations contain unjustified discriminatory taxation between resident and non-resident companies, which restricts the Free Movement of Capital. Under these circumstances, and given that the IRNR regulations at the state level are similar to the regional ones, the Spanish State should modify the current tax regulations to establish a mechanism for the refund of withholdings that cannot be recovered by foreign investors. This would be in order to eliminate any vestige of discrimination in the taxation of dividends (and other income subject to withholding at source, such as interest or royalties) between residents and non-residents, ensuring respect for the free movement of capital.
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