Withholding tax claims in Spain: How to maximize investment performance of foreign funds

Amidst a global pandemic which has created risk and uncertainty for investors, the refund of undue withholding taxes on dividends can be a silver lining and a neglected cash injection.

The Spanish Supreme Court (Tribunal Supremo) has recently confirmed the right to claim and obtain, by a U.S. Regulated Investment Company (RIC), the refund of withholding taxes paid on dividends received from Spanish entities —together with the relevant late payment interest accrued from the day the withholding was paid to the Spanish tax authorities—, recognizing that US RICs have a comparable nature to that of a qualifying Spanish investment fund and that rejecting the claim constitutes an unjustified discrimination.

Case law has evidenced that the cornerstone for the withholding tax refund is the comparable regulatory framework of a foreign fund to that of the UCITS Directive.

Despite clear rulings of the judicial courts, notably not only of the Spanish Supreme Court, but also of the National Court (Audiencia Nacional) and the High Court of Justice of Madrid (Tribunal Superior de Justicia de Madrid), the Spanish tax authorities have not recognized this right yet and are still challenging refund claims filed by US RICs. However, we are to expect that this will change in the near future given that the State’s Attorney is already settling such claims. The fact that the Spanish tax authorities are still reluctant to rule in favor of US RICs should not be deterrent to foreign funds, as US RICs will obtain the refund by means of a straight forward judicial proceeding.

Now that the Spanish Supreme Court has ruled on the entitlement to obtain withholding tax refund of US RICs , the question remains open what will the Spanish judicial position be regarding investment funds being tax resident in other non-EU countries, to which the UCITS Directive is not applicable. Nevertheless, it is advisable for all foreign funds which are non-EU tax residents to explore this opportunity in order to maximize returns on investments and portfolio performance, insofar this comparability analysis can be proven.

In this regard, the impact of withholding tax on dividends received by UK funds within the framework of the Trade and Cooperation Agreement reached by the UK and the European Union, shall not be overlooked.

Although the UCITS framework has been on-shored into domestic law, UK UCITS will, most probably, not be able to benefit from the withholding tax exemption on dividends granted to EU UCITS and will only benefit from the reduced rate set forth in the Double Tax Treaty. UK UCITS can follow the path of proving that the fund is comparable to domestic qualifying investment funds and should, therefore, receive an identical tax treatment.

The key takeaway is that an innovative way exists to increase investment performance of foreign funds by claiming undue withholding tax on dividends received from Spanish entities. DLA Piper has expertise in both the administrative procedure and the judicial proceedings to obtain the refund of withholding tax and can offer a global assistance to foreign funds and tax recovery firms. Furthermore, DLA Piper also brings to the table a deep and comprehensive understanding of domestic regulations, which enables us to be committed to securing the maximum recovery amount.