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Freshfields Risk & Compliance

| 5 minutes read

Developments in Spanish taxation of dividends received by non-resident investment funds

The Spanish Supreme Court has recently confirmed that dividends paid by Spanish companies to non-resident open-ended alternative investment funds (AIFs) managed by alternative investment fund management companies authorised by the Alternative Investment Fund Managers (AIFMs) EU Directive (2011/61/EU) should be subject to Spanish tax at a 1% tax rate rather than the general 19% dividend withholding tax rate (or any applicable reduced tax treaty rate). This aligns with the tax position for Spanish alternative investment funds (fondos de inversión libre), which are subject to Spanish corporate income tax at a 1% rate.

Recent Spanish Supreme Court decisions

The Spanish Supreme Court judgements dated 5 April 2023 and 11 April 2023 deal with the Spanish taxation of dividends received by two French AIFs managed by French AIFMs that  were subject to Spanish dividend withholding tax at the 15% rate under the France-Spain double tax treaty. The French AIFs requested a partial refund of the Spanish withholding tax suffered on these dividends on the basis that they were comparable to Spanish alternative investment funds, which are subject to corporate income tax at a 1% rate. The French AIFs argued that this difference in tax treatment resulted in the breach of an EU fundamental freedom: namely the free movement of capital as provided for in Article 63 of the Treaty on the Functioning of the EU (TFEU). 

The Spanish Supreme Court upheld the French AIFs’ arguments and confirmed the following aspects:

  • infringement of the free movement of capital: the Spanish tax legislation dealing with the taxation of alternative investment funds infringes the free movement of capital as it results in an unjustified different treatment between Spanish and non-resident AIFs that are in a comparable position. Specifically, the Spanish tax legislation grants Spanish AIFs a significantly more beneficial tax treatment on dividends received from Spanish companies, as they are subject to corporate income tax at 1% rate, while non-resident AIFs are subject to Spanish dividend withholding tax at a 19% rate (unless reduced under the applicable double tax treaty);

  • approach to comparator analysis: in the light of the Spanish tax legislation breaching EU law by imposing different tax treatment on AIFs depending on their tax residency, the comparator analysis between non-resident and Spanish AIFs should be based on the fundamental criteria required by the Spanish legislation in order to grant the most beneficial tax treatment to Spanish AIFs, which should be interpreted in accordance with the provisions of the AIFM Directive (that governs the management of AIFs) and the domestic legislation applicable to the non-resident AIF in its home state;

  • specific factors to be satisfied for comparator analysis: the Spanish Supreme Court also outlined the specific factors that should be used to conclude that Spanish and non-resident AIFs are in objectively comparable situations when they receive Spanish dividends. In particular, the following specific factors should be present in order to be able to conclude that a non-resident AIF is comparable to a Spanish AIF:

    • the non-resident AIF should be an “open-ended” entity – that is, an entity that raises capital contributions from the general public (and this is status is maintained if the non-resident AIF in question is limited to professional or institutional investors);

    • the non-resident AIF should be authorised to operate in its home country by the competent authority for the control and supervision of collective investment undertakings; and

    • the non-resident AIF should be managed by an entity authorised in its home country as an AIFM in accordance with the AIFM Directive.

When these factors are met, non-resident AIFs should receive the same tax treatment as Spanish AIFs and thus, be subject to tax at a 1% rate on Spanish dividends.

The Supreme Court expressly confirmed that other elements required by the Spanish legislation in order to qualify as a Spanish AIF, such as the number of participants or unitholders, the minimum share capital, specific investment policy and risks and diversification requirements are not relevant for the comparator analysis between non-resident and Spanish AIFs.

The burden of proof and evidential requirements

The Spanish Supreme Court also confirmed that, in order for the 1% rate to apply, the non-resident AIF should evidence that the comparator requirements set out above are met. However, the Supreme Court acknowledged that the Spanish legislation does not include express rules setting out the specific type of proof to be provided to demonstrate such comparability and concluded that requiring non-resident AIFs to produce the same documentation required for Spanish AIFs and/or documentation that is disproportionate or extraordinarily difficult for a non-resident AIF to obtain cannot be required by the Spanish tax authorities. 

In addition, the Supreme Court confirmed that when the Spanish tax authorities are not satisfied with the evidence provided by the non-resident AIF, they should actively use any means available to them in order to confirm the required information, including under the various methods for exchange of tax information such as double taxation or exchange of information treaties and/or the mechanisms available under EU Directive on Administrative Co-operation (2011/61/EU). The Supreme Court went as far as to say that the unjustified omission by the Spanish tax authorities to use these information exchange mechanisms could point towards a conclusion that the evidence provided by the non-resident AIF in a co-operative and comprehensive manner is sufficient to prove the comparability with a Spanish AIF.

Other related Spanish case law on dividend taxation 

These judgments are in line with prior decisions of the Spanish Supreme Court and the Spanish National Court in which they have concluded that the Spanish tax legislation providing for the taxation of dividends received by different types of non-resident funds infringes the EU fundamental freedom of the free movement of capital. These decisions have considered the position for the following funds:

  • foreign sovereigns, such as the Norway’s Government Pension Fund or the Kuwait Investment Authority, which Spanish Courts have concluded are comparable to domestic Spanish public entities and thus should benefit from the same tax treatment available to Spanish public sector bodies (e.g., the State and its subdivisions, entities governed by public law, central banks, the Spanish Public Deposit Guarantee Fund of Credit Institutions, the social security department, etc.), and be exempt from Spanish taxation on Spanish dividends (please see our blog post Developments in Spanish tax exemptions for sovereign investors: impact for M&A deals and tax disputes for further details);

  • Canadian pension funds, where the Spanish Supreme Court has concluded that these funds are comparable to Spanish pension funds and consequently should benefit from an exemption from Spanish taxation on Spanish dividends in accordance with the tax treatment afforded to Spanish pension funds; and

  • US mutual investment funds, which the Spanish Supreme Court has concluded are comparable to Spanish UCITs and therefore, should benefit from a 1% tax rate when they receive Spanish dividends, reflecting the tax treatment available to Spanish UCITs. In these decisions, the Supreme Court concluded that the comparator analysis with US investment funds needs to be made as against EU funds within the scope of the UCITS Directive (2009/65/EU), rather than by reference to the specific requirements of the Spanish domestic law.

Key takeaways 

The most recent decisions of the Spanish Supreme Court provide a good opportunity for non-resident investment entities with Spanish investments to review the Spanish tax position of such investments. In the light of these recent judgements on AIFs, and considering the trend followed by Spanish Courts applying the EU free movement of capital principle in recent years, non-resident investors might now be better placed to evidence their comparability with particular Spanish investment entities that benefit from lower tax rates and put forward arguments for seeking a refund of the withholding taxes suffered on their Spanish investments – not only on dividends but also on other types of Spanish source income. 

If you would like to discuss any of the points raised in this blog post in further detail, please contact our Spanish tax team or your usual Freshfields contact. 


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