The Court of Justice of the European Union (CJEU) issued an important decision on 19 December 2024 on the compatibility of Spain’s dividend withholding tax rules with EU law, concluding that the rules in the province of Viscaya violate the free movement of capital principle under article 63 of the Treaty of the European Union (TFEU). Although the CJEU decision was rendered in the context of the withholding tax rules in the province, we believe the decision should apply throughout the country.
The case involved a UK company without a permanent establishment in Spain that (pre-Brexit) received dividends from a company established in Viscaya. Viscaya, which has autonomous taxing authority within Spain, imposes a 19% withholding tax on dividends, whether paid to Spanish resident or non-Spanish resident companies (this tax was ultimately reduced to 10% under the Spain-UK tax treaty). The Viscaya rules, however, do not allow nonresident entities in loss positions to recover withholding tax paid on dividends, but do allow such recovery in the case of resident entities.
The UK company requested a refund of the withholding tax paid, which was denied by Spain’s tax authorities. The company appealed the case through the Spanish courts, with the issue finally landing before the CJEU.
The CJEU concluded that the Vizcaya rules constitute a restriction on the free movement of capital provisions in article 63 of the TFEU because of the different tax treatment of resident and nonresident entities and this restriction cannot be justified by the Spanish government. The court cited the following reasons for its conclusion:
We believe that the CJEU’s ruling affects Spain’s standard rules, which also do not allow a refund of withholding tax paid by nonresidents in loss situations. Potentially affected businesses in Spain should assess their situations and determine whether they may be entitled to a refund of tax; the same is true for entities doing business in other EU member states with similar rules. It should also be noted that article 63 of the TFEU applies to countries outside the EU that have concluded a tax treaty with Spain that contains an exchange of information provision.
Antonio Puentes
BDO in Spain
Facts of the Case
The case involved a UK company without a permanent establishment in Spain that (pre-Brexit) received dividends from a company established in Viscaya. Viscaya, which has autonomous taxing authority within Spain, imposes a 19% withholding tax on dividends, whether paid to Spanish resident or non-Spanish resident companies (this tax was ultimately reduced to 10% under the Spain-UK tax treaty). The Viscaya rules, however, do not allow nonresident entities in loss positions to recover withholding tax paid on dividends, but do allow such recovery in the case of resident entities.The UK company requested a refund of the withholding tax paid, which was denied by Spain’s tax authorities. The company appealed the case through the Spanish courts, with the issue finally landing before the CJEU.
Decision of the CJEU
The CJEU concluded that the Vizcaya rules constitute a restriction on the free movement of capital provisions in article 63 of the TFEU because of the different tax treatment of resident and nonresident entities and this restriction cannot be justified by the Spanish government. The court cited the following reasons for its conclusion:
- Different tax treatment: The difference in treatment between resident and nonresident entities creates an advantage for resident entities but a disadvantage for nonresident entities.
- Guarantee of tax collection: The need to ensure the effective collection of tax does not justify discrimination.
- Mutual assistance: The tax authorities must use mutual assistance mechanisms to verify the losses of nonresident entities.
- Reduced rates under the treaty: The lower beneficial tax rates under the Spain-UK tax treaty do not compensate for the disadvantages.
BDO Insight
We believe that the CJEU’s ruling affects Spain’s standard rules, which also do not allow a refund of withholding tax paid by nonresidents in loss situations. Potentially affected businesses in Spain should assess their situations and determine whether they may be entitled to a refund of tax; the same is true for entities doing business in other EU member states with similar rules. It should also be noted that article 63 of the TFEU applies to countries outside the EU that have concluded a tax treaty with Spain that contains an exchange of information provision.Antonio Puentes
BDO in Spain