In light of the caselaw established by the Court of Justice of the EU ("CJEU") in its landmark judgments of February 26, 2019 (regarding dividends in joined cases C-116/16 and C-117/16), commonly known as the "Danish cases", the Spanish Supreme Court has ruled on the tax treatment of dividends paid by Spanish entities to their EU parent companies for Nonresident Income Tax ("NRIT") purposes.
Transposing Article 5 of the Parent–Subsidiary Directive ("PSD"), article 14.1.h) of the NRIT Act exempts these dividends. However, it also provides for an anti-abuse rule to ensure that the exemption is not unduly extended to recipients outside the EU who are not eligible for the tax benefits provided for in the PSD. Although the Supreme Court had already ruled on this anti-abuse clause in 2012 and 2017, this is the first time that it specifically addresses the CJEU caselaw on these clauses.
The Supreme Court agreed to review on appeal several judgments of the High Court (Audiencia Nacional), each with different procedural backgrounds. Two cases arose from an audit on withholding taxes of the Spanish payer of the dividends, while another arose from a refund claim of withholdings initiated by the foreign payee. Although the content of those judgments differed, the task of the Supreme Court was the same: to interpret the anti-abuse clause of the NRIT Act with regard to the burden of proof. Specifically, the Supreme Court first issued its criterion regarding the decision of the High Court dated May 21, 2021 (rec. nº 1000/2017).
In this case, the State Attorney appealed by arguing that the burden of proof should remain with the taxpayer, who can readily provide evidence to justify his genuine right to the exemption. Moreover, as it had been admitted that the entity receiving the dividend was a mere conduit of income outside the EU, the State Attorney considered that the exemption should be denied under CJEU caselaw. However, the taxpayer considered this inversion of the burden of proof unacceptable, which in fact has been removed from the rule’s current wording. Regarding the specific case, the company argued that it was acknowledged that the alleged conduit entity was the true beneficial owner of the dividends and that it was in any case controlled by pension funds that should also be entitled to the NRIT exemption.
The Supreme Court dismissed the State Attorney’s appeal and upheld the High Court’s decision, highlighting that the factual nature of these cases is alien to Supreme Court processes. However, the Supreme Court develops arguments that will undoubtedly be relevant in the multiple proceedings that the tax authorities have initiated relating to their interpretation of the caselaw on the Danish cases.
The judgment includes an interesting theoretical analysis of the PSD and the above caselaw of the CJEU. However, the Supreme Court itself acknowledges that its role is not advisory and does not give rise to legal opinions. This could explain the gaps in various technical issues of interest that could be resolved in the future. In any case, it is worth highlighting how, contrary to the opinion of the Spanish tax authorities (resolution of October 8, 2019, rec. 2188/2017), the Supreme Court considers fully valid the criterion of the CJEU in its judgments of September 7, 2017 (case C-6/16 Eqiom) and December 20, 2017 (case C-504/16 Deister).
In line with these judgments, as well as with those relating to the Danish cases, and in contrast to its previous caselaw (which has been abandoned), the Supreme Court concludes that the burden of proof regarding the abuse that prevents the NRIT exemption from applying rests with the tax authorities and not with the taxpayer.
On this central point regarding the burden of proof, the decision is clear and its criterion unequivocal, as is the case with the CJEU’s caselaw. However, the Supreme Court’s position on the connection between tax abuse and the concept of beneficial owner seems to raise further doubts. As the State Attorney points out, this is a key issue because the CJEU indicated that, if the dividend recipient resides outside the EU, the authorities may deny this exemption without having to prove any fraud or abuse. However, the CJEU did not make that statement in abstract terms but in the context of its analysis of abuse (as the Supreme Court itself notes in its judgment). Moreover, in letters d) and e) of its fourth preliminary ruling, the CJEU responded to the question regarding the impact of the beneficial owner concept by referring to its concept of abuse based on objective and subjective elements.
As the PSD does not require the dividend recipient to be its beneficial owner, the second approach appears to be more appropriate. However, this new decision of the Supreme Court does not entirely clarify the uncertainty. On the one hand, the Court orders the application of the national anti-abuse rule (based on valid economic reasons) when it exists and corrects the State Attorney when he states that “the equation that seems to follow from his thesis is not correct, that whenever the beneficial owner is the entity of a third state, abuse is presumed, which is different from what has just been indicated, that the inspection had proven that there is no valid economic reasons for establishing the parent entity". However, although the NRIT Act does not include a beneficial ownership test, the judgment also states that "it is a substantive requirement to enjoy the benefit that the parent entity is really the one that receives the dividends and has the power to decide freely on their destination". This is a controversial statement, as the Supreme Court itself previously clarified that this aspect is not the point of contention in the process.
In any case, the situation described has material implications, as the Spanish tax authorities’ controversial approach to beneficial ownership may result in cases being excluded even when there are valid economic reasons for the dividend recipient’s role. If, as the Supreme Court states, the application of the national anti-abuse clause must be respected, only the abuse verified in the absence of these business reasons should provide sufficient basis to deny the exemption provided for in article 14.1.h) of the NRIT Act. For these purposes, the criterion of the CJEU in the Danish cases should be relevant, along with the CJEU’s judgment of December 20, 2017, particularly because the Supreme Court refers to all these precedents in its reasoning.
Finally, it should be noted that the Supreme Court does not rule on the argument of the taxpayer linked to the right to exemption of the ultimate entity resident outside the EU. An opinion on this point would have been welcome, not only due to its relevance in assessing the tax advantage inherent to any abuse but also considering (a) the unjustified timidity with which the CJEU ruled on the issue, and (b) that that exemption is not expressly provided for in the NRIT Tax Act but derives from the Spanish and EU caselaw interpreting the free movement of capital.