B Law & Tax
05 October 2023

Tax advisor:The National Court orders the refund of withholding taxes to foreign investment funds in Spain

The National Court has been resolving appeals filed by non-resident investment funds challenging the withholdings applied by the Tax Agency to dividends from Spanish companies. These withholdings, imposed at a rate of 15%, were deemed unfair compared to the 1% applied to similar institutions resident in Spain. As a result of the Supreme Court’s judgments in April, the National Court has ordered the Tax Agency to refund these withholdings along with the corresponding interest. The investment funds argued that these withholdings violated the free movement of capital established in Article 63 of the Treaty on the Functioning of the European Union (TFEU).


However, the Tax Agency argued that these funds are not comparable to Spanish Collective Investment Institutions (CIIs) either in terms of the number of participants or their open nature.


In its April judgments, the Supreme Court determined that the funds in question are not equivalent to Collective Investment Institutions (CIIs) but rather to Free Investment Funds (FIL). This distinction is based on several factors, such as management and custody being handled by third-party professional entities, offering to professional investors, and compliance with information and transparency requirements similar to those in Spain. Additionally, these funds are subject to supervision by competent authorities. The Tax Agency, represented by the State Attorney, justified the tax withholding by arguing that it did not have information about whether taxes had already been deducted in the country of origin, which could affect taxation.


In this regard, the Supreme Court stated in its judgments issued on April 5, April 11 (three judgments), and April 25 that, with respect to Double Taxation Treaties, it will only be considered that the withholding tax applied in Spain has been neutralized if the company can deduct it in its country of origin “up to the limit of the difference in treatment established by national regulations.”


However, Collective Investment Institutions (CIIs) and Free Investment Funds (FIL) are typically exempt from taxes in their countries of origin, such as in the case of the United States, France, or Germany. Therefore, it is unlikely that they can apply the deduction in their countries of origin, let alone receive a refund of the amount withheld by the Spanish Tax Agency.


Furthermore, it should be noted that Spanish legislation on Corporate Income Tax does not establish any conditions in this regard, neither concerning the timeframe for FILs to distribute profits to their participants nor regarding the treatment received by these participants.


Following this jurisprudence, the National Court has issued a series of rulings in favor of these funds in recent months. Some of the cases include asset managers Lazard, Deka, and Universal, which manage several funds in Germany on June 30; Vanguard Global Equity (USA) on July 4th; Amundi (France) on July 5th; Blackrock (USA) on July 10th; Principal Funds (USA) on July 12th; and Bayerninvest (Germany) on July 20th.


Free Investment Funds (FIF), designed for investors with certain knowledge and a minimum investment of 100,000 euros, are also known as alternative investment funds or hedge funds.


One of their distinctive features is that they are not subject to the investment restrictions that affect most funds, allowing them to invest in a wide range of assets, apply flexible strategies, and use leverage more extensively in their wealth management.


B Law & Tax International Tax & Legal Advisors.


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