B Law & Tax
30 June 2023

Tax advisor: Supreme Court requires Treasury to prove abuse before it can deny exemption for expatriate dividends

In its ruling, the Supreme Court ruled against the Treasury and establishes that the Administration must demonstrate that the taxpayer lacks valid reasons for claiming the dividend exemption. The Contentious-Administrative Chamber established a new doctrine that establishes that the burden of proof regarding the abuse that prevents benefiting from the exemption of dividends in the Non-Resident Income Tax (IRNR) falls on the Ministry of Finance and not on the taxpayer. In other words, it will be up to the Tax Administration to prove that there are no valid economic reasons to deny the exemption of dividends generated outside Spain. The Supreme Court applies the case law of the Court of Justice of the European Union (CJEU), established in several judgments issued in 2017 and 2019, and adjusts its doctrine in relation to the interpretation of the anti-abuse clause found in the IRNR law.

The General State Administration filed an appeal in which it argued that the burden of proof to apply the exemption established in article 14.1.h of the IRNR law, and therefore, to prove that the anti-abuse clause does not apply, fell on the taxpayer who benefits from such exemption. However, the Supreme Court has clearly supported the taxpayer by establishing that this responsibility falls exclusively on the Tax Administration, something that had previously been affirmed by the Audiencia Nacional.

In the judgment establishing this new and definitive criterion, the judges reject the arguments presented by the General State Administration against a judgment of the National High Court of May 21, 2021. Said ruling supported a company that, in February 2010, did not withhold tax on the distribution of dividends of 7 million euros to its parent company resident in Luxembourg, as it considered that it was exempt from such withholding.

After carrying out an inspection, the Tax Agency issued in March 2014 a settlement to the company in question, which resulted in a debt of €838,753.43 payable. Of that amount, €700,000 corresponded to the tax liability and €138,753.43 was late payment interest.

The Tax Agency reached this conclusion by considering that the company had not demonstrated the existence of valid economic reasons for establishing the parent entity in Luxembourg, so that the above mentioned exemption would not be applicable.

The hearing rejected the possibility for the Inland Revenue to exempt itself from submitting minimal evidence to reject the existence of a valid economic motive. In other words, it is established that the Tax Administration cannot automatically assume that the only reason for setting up an intermediate structure in a country other than the one in which the final investment is made is always tax savings.

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