B Law & Tax
24 July 2023

Tax advisor: Supreme Court to rule on restrictions on free movement of capital, derived from IRNR regulations, for U.S. resident mutual funds

The contested ruling notes that there is a significant increase in cases involving the taxation of non-resident collective investment schemes that receive dividends from Spanish companies. In many cases, these institutions are resident in countries with which Spain has agreements to avoid double taxation. In this type of situation, the key issue is the neutralization of the difference in treatment compared to collective investment schemes resident in Spain. In addition, there is no case law establishing the necessary criteria to consider a U.S. resident collective investment scheme comparable to the entities subject to harmonization under Directive 2009/65/EC.

According to the data provided by the Central Delegation of Large Taxpayers of the AEAT, at the end of September, there were around 8,215 refund requests appealed in economic-administrative channels, totaling close to 54 million Euros. In addition, in the contentious-administrative channel at the National High Court, around 11,490 refund requests were registered (these do not refer to individual appeals, since each appeal may include several requests), with an approximate amount of 107 million Euros.

Therefore, it is necessary for the Supreme Court to rule in order to clarify two aspects. Firstly, to determine which attributes of Directive 2009/65/EC must be present in a US resident entity in order to consider it comparable to harmonized investment funds, especially when its object does not coincide with that of harmonized funds and they are not of an open-ended nature. Second, the question arises as to whether the neutralization doctrine established by the Court of Justice of the European Union under double tax treaties applies in cases where a non-resident entity, which has the option to be taxed for its personal tax with deduction of the Non-Resident Income Tax (IRNR) levy, elects to transfer income and tax credits to its partners or participants, regardless of what happens at the level of the partners or participants. The issues to be determined are whether it is sufficient to demonstrate that a non-resident entity equivalent to the harmonized investment funds can, according to the corresponding DTAA and the domestic regulations of the country of residence, choose to be taxed on its personal tax with deduction of the IRNR levy or transfer income and tax credits to its partners or participants, regardless of whether the latter can neutralize the tax in that second tier. Furthermore, it should be clarified whether, in cases where it is demonstrated that the U.S. resident entity can completely neutralize, at the first level, the difference in tax treatment in Spain according to the treaty and the U.S. regulations, the fact that it finally opts to impute the income and transfer the tax credit to the partners or participants implies the realization of such neutralization through the mechanism established in the treaty to avoid double taxation, being irrelevant whether or not neutralization occurs at the second level and, consequently, the evidence related to this last point being insignificant.

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