Spanish Supreme Court ruled burden of proving abuse rests with the tax administration

The Spanish Supreme Court announced its decision establishing that the burden of proving abuse in the exemption of dividends distributed to EU parent companies, the so-called non-resident income tax (NRIT) exemption on dividends based on the Parent-Subsidiary Directive, lies with the tax administration.

Key features

As a general rule, Spanish companies should make withholdings on dividends paid to non-resident shareholders at the general 19% NRIT rate. However, according to the implementation of the Parent-Subsidiary Directive in Spain, no Spanish withholding tax is levied on the dividends distributed by a Spanish subsidiary to an EU-based parent company if the following conditions are met:

• The EU parent company and the Spanish subsidiary are subject to Corporate Income Tax without the possibility of being exempt.
• The dividends distributed do not result from the subsidiary’s liquidation.
• The EU parent company is incorporated under the laws of an EU Member State, in one of the corporate forms listed in the Parent-Subsidiary Directive.
• The EU parent company holds directly at least 5% of the subsidiary’s share capital uninterruptedly during the year prior to the date on which the profit is due to be distributed or, failing that, it keeps the holding for the time required to complete such period.

The NRIT Law includes an anti-abuse provision by virtue of which the withholding tax exemption will not be applicable when the majority of the voting rights of the parent company are held directly or indirectly by individuals or entities not resident in the EU, except when the EU parent company has been incorporated for valid economic reasons and “it can be evidenced that the incorporation and operation of the EU entity respond to sound economic purposes and significant business reasons”.

In this regard, the Central Economic-Administrative Court (CEAC) issued a resolution on 8 October 2019, applying the criteria of the EU Court of Justice in the Danish Cases to the above-mentioned NRIT exemption. The CEAC concluded that the Luxembourg holding company (controlled by a non-EU resident) could not benefit from the exemption on dividend as it was not the beneficial owner of the dividend and it had not evidenced that its incorporation and operation in the EU responded to sound economic purposes.

Finally, this question has reached the Supreme Court who concluded, following the criteria of the EU Court of Justice in judgments of 2017 (C-6/16, C-504 and 613/16) and 2019 (C-116 and C-117/16), that the burden of proof on the abuse of law lies with the Tax Authorities and not with the taxpayer.

The Supreme Court confirms the previous decision of the Spanish National Court, of 21 May 2021, which limited the application of the anti-abuse provision laid down in the NRIT Law, stating that the Spanish Tax Authorities may not presume abuse of the taxpayer if the beneficial owner of the dividend is resident in a non-EU jurisdiction.

On the contrary, following this decision, the burden of proof lies with the Spanish Tax Authorities to evidence the existence of an abusive practice, using the information received under the administrative cooperation procedures.

Key takeaway

The decision can be seen as being favorable for taxpayers as it limits the rather broad interpretation of the beneficial ownership doctrine developed by the CEAC and sets the burden of proof of an abusive practice on the tax authorities.

Following this decision, taxpayers should challenge application of the anti-abuse provision laid down in the NRIT Law by the Spanish Tax Authorities in the course of ongoing tax audits and tax litigation.