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Spanish Courts Interpretation of Anti-Abuse Provision in Relation to Parent-Subsidiary Directive

28 Jan 2010

The EU Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States establishes a tax exemption for dividends distributed by entities resident in one Member State to entities resident in another different Member State.

Taxand Spain reports the tax effects of certain decisions from the Spanish Tribunals in connection with this exemption.

This Directive also contains an anti-abuse provision which seeks to prevent situations where an entity residing outside the EU and acting through a wholly controlled interposed company in an EU Member State (i.e., as the beneficial owner) benefits from the exemption and distributes dividends without being taxed in any EU country. The Spanish legislation implementing this Directive accordingly establishes that the exemption is subject to the fulfillment of the following requirements:

  • both companies must be subject to and not exempt from taxes on their income
  • the distribution of the income must not be the result of the liquidation of the subsidiary
  • they must take one of the legal forms recognised by Directive 90/435/EEC
  • the beneficial owner must be resident in the EU.

In this connection, we learnt at the end of last year of a decision by the Central Economic-Administrative Tribunal (the "TEAC") the a Tribunal included in the structure of the Spanish tax Administration, dated 28 September 2009, disallowed an exemption claimed by an entity resident in a Middle Eastern country based on the dividends distributed by the Spanish investee of a UK company set up by the entity.

In its decision, the TEAC held that the UK company was a vehicle created solely for the purpose of qualifying for the exemption, since it had no employees and its registered office was a law firm, and that, therefore, the company acted as a conduit for the ultimate beneficiary (the Middle Eastern entity).

The TEAC also ruled that it was appropriate to impose a fine equal to 75% of the tax deficiency, as had been initially proposed by the tax inspectors, since it considered it had proven that there had been an intention to conceal the beneficial owner.

However, in what appears to be a shift in the tax authorities' position, the TEAC suggested that the applicable tax treatment should be based on the tax treaty between Spain and the beneficial owner's country of residence, and not on the UK-Spain tax treaty. However, since the tax inspector had not taken this view, the TEAC did not enforce it.

Since there was no tax treaty at the time between Spain and the Middle Eastern country, this would have resulted in application of Spanish domestic Law.


Taxand's Take

In our opinion, it is time for non-EU multinationals with investments in Spain routed through an EU parent company to review this issue carefully in order to prevent tax risks.

Your Taxand contacts for further queries are:
Vicente Bootello
T. +34 91 514 52 00

Jos? Ignacio Ripoll
T. +34 91 514 5200

Taxand's Take Author