The Spanish Supreme Court declares the existence of discrimination in the taxation of non-resident AIF when receiving dividends from Spanish companies

The Spanish Supreme Court declares the existence of discrimination in the taxation of non-resident AIF when receiving dividends from Spanish companies

New WHT reclaim opportunity : The Spanish Supreme Court has identified discrimination in the taxation of non-resident alternative investment funds (AIFs) receiving dividends from Spanish companies. In a recent decision of April 5, 2023, the Court heard for the first time the tax issue of non-resident AIFs receiving dividends from Spanish companies, thus raising the possibility of unfair tax treatment compared to resident AIFs. This decision concerns a French AIF.

Prior to this, the Court had already found tax discrimination in cases of March 27, 2019 and November 13, 2019, involving a non-resident UCITS fund and a US-resident fund. This was before Law 2/2010 of March 1st reformed the legal framework, aligning the taxation of non-resident and resident UCITS through a legal mechanism allowing non-resident funds to be refunded the excess withholding at source. This mechanism brought them closer to the effective taxation of 1% applied to resident harmonized funds, simply by providing a certificate of compliance with Directive 2009/65/EEC.

However, this legislative reform failed to include non-harmonised investment funds, leading to a series of legal claims in recent years from these types of funds. The aim of these claims was to obtain equal treatment in terms of taxation, with effective taxation of 1% similar to that of their resident counterparts. These claims have argued against discriminatory tax treatment without justification, which hinders the free movement of capital. In this situation, the Supreme Court ruled for the first time on this issue, with an alternative investment fund (AIF) residing in France as plaintiff.

The Supreme Court of Spain established this important legal rule, thus setting a significant precedent. The decision prompted two separate dissenting opinions, illustrating the disagreements. These opinions argue that the majority opinion is too lenient; non-resident alternative investment funds (AIFs) should be subject to the same rules as resident AIFs under national laws. This rule was confirmed by the Court in other decisions taken on the following days (between April 5 and April 25) with similar divergent opinions. We don’t yet know if the Spanish tax authorities or the Central Economic and Administrative Court (TEAC) will adopt this Supreme Court rule when considering pending complaints, or if they will stick to the arguments of the dissenting opinions. However, it is certain that a promising future opens up for the future claims of this type of fund. Moreover, since this rule is based on the violation of Article 63 of the TFEU, which deals with the free movement of capital between EU Member States and other countries, one would think that these arguments should be apply not only to EU AIFs, but also to AIFs from third countries.

Positive decisions by the Courts of Appeal for the reimbursement of taxes wrongly withheld on dividends from European equities are frequent.

It is crucial to monitor them to ensure optimal taxation for your funds.

Alternatively, we invite you to contact us to carry out a free analysis of the taxation of your funds.