B Law & Tax
30 June 2023

Tax Advisor: The Supreme Court establishes that the Tax Administration Agency has the burden of proving the abuse of the IRNR exemption

The Contentious-Administrative Chamber of the Supreme Court has established that the Tax Administration has the burden of proving the abuse that prevents the application of the exemption in the Non-Resident Income Tax (IRNR). The Supreme Court has analyzed the case law of the Court of Justice of the European Union, and adjusts its doctrine to the interpretation of the anti-abuse clause of Article 14.1.h of the TRLIRNR. This article establishes the tax exemption for profits distributed by subsidiaries resident in Spain to their parent companies in other European Union countries or to their permanent establishments in other Member States, provided that certain requirements are met.

However, there is an anti-abuse clause, which states that the exemption established in this clause h) does not apply when the majority of the voting rights of the parent company are held, directly or indirectly, by individuals or legal entities that are not resident in Member States of the European Union or in States that are part of the European Economic Area, provided that there is no effective exchange of tax information in accordance with the provisions of paragraph 4 of the first additional provision of Law 36/2006, of November 29, 2006, on measures for the prevention of tax fraud, unless the incorporation and operation of such company respond to valid economic and substantive business reasons.

However, the Supreme Court examines the doctrine of the CJEU in relation to this issue, which is reflected in two judgments of 2017 and one of 2019, and concludes that the burden of proof of abuse lies with the tax administration.

In the judgment, the Supreme Court rejects the appeal filed by the General State Administration against a judgment of the Audiencia Nacional dated May 21, 2021. In this ruling, a company that, in February 2010, did not withhold IRNR for a dividend distribution of 7 million euros to its parent company resident in Luxembourg, arguing that it was exempt under Article 14.1.h of the Consolidated Text of the Law, was upheld.

After carrying out an inspection, the Tax Agency issued in March 2014 a requirement to the company, demanding the payment of a debt totaling €838,753.43. Of this amount, €700,000 corresponded to the tax installment and €138,753.43 was late payment interest. The Tax Agency argued that the exemption contemplated in article 14.1.h did not apply, since the taxpayer entity had not demonstrated the existence of valid economic reasons for the incorporation of the parent entity in Luxembourg.

In the judgment that has been confirmed, the Audiencia Nacional determined that the Agencia Estatal de Administración Tributaria (AEAT) had incurred in a presumption of exclusively fiscal purpose, which violated the doctrine established by the CJEU. This presumption was produced by reversing the burden of proof in relation to the arguments of the company, which invoked the existence of economic motives, and established that it was the responsibility of the Tax Administration to justify the requirements to apply the anti-abuse clause, with a greater burden of proof on the part of the Administration.

The Supreme Court, after carefully examining the case law of the CJEU, agrees with the Audiencia Nacional in stating that it is up to the Tax Administration, and not the taxpayer, to demonstrate the necessary requirements for the application of the anti-abuse clause, using the means of information provided for in the double taxation treaties or in the Directive on Exchange of Information.

B Law & Tax International Tax & Legal Advisors.

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