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Spanish courts adhere to Danish conduit cases

When we were still immersed in uncertainty following the judgments of the CJEU on the Danish conduit cases, the Spanish High Tax Court (Tribunal Económico-Administrativo Central), a non-judicial and appeal body that forms part of the Spanish Tax Authority, issued on 8 October 2019 two controversial rulings (ref. 00/00185/2017/00/00 and 00/02188/2017/00/00) citing this case law. These are the first Spanish judicial references to the Danish conduit cases in Spain. While they were issued almost a year ago, it was not until recently that the text of the second ruling (dealing with cross-border dividend payments) was made public.

Both rulings adopt a restrictive approach to granting the benefits derived from the Interest and Royalties Directive and Parent-Subsidiary Directive. This post focuses on the ruling denying the withholding tax exemption stemming from the Parent-Subsidiary Directive to dividends paid by a Spanish company to its Luxembourg shareholder (the “Exemption”). Briefly, the Spanish High Tax Court understands that the Danish conduit cases represent a change in the CJEU’s interpretation of the specific anti-abuse rules and their compatibility with EU law. The structure challenged can be summarized as follows:

XHL, a Luxembourg resident company mostly financed through Convertible Preferred Equity Certificates (CPECs) underwritten by its sole shareholder, XH, held a 9.5% stake in Z, a Spanish listed company operating in the energy sector. XH was a holding company not resident in an EU Member State and wholly owned by a non-EU sovereign fund.

In 2013 and 2014, Z paid dividends to XHL, withholding tax at a reduced rate of 15% in accordance with the Spain/Luxembourg double tax treaty. XHL requested a refund of that withholding tax from the Spanish Tax Authority, claiming that the dividends benefitted from the Exemption.

The Spanish Tax Authority concluded that neither the Exemption nor the reduced treaty rate could apply. Amongst others, a specific anti-abuse rule (the “SAAR”) was cited which prevents the application of the Exemption if a non-EU-resident owns, directly or indirectly, the majority of the voting rights of the EU-resident parent receiving the benefits from the Spanish subsidiary. This presumption could, however, be rebutted if the parent was able to prove that it was incorporated under valid commercial reasons.

Spanish High Tax Court decision 

The Spanish High Tax Court agreed with the Spanish Tax Authority that the Exemption should be denied, addressing in particular the authority’s reliance on the SAAR. 

Applying the SAAR

XHL had argued that the SAAR was inapplicable on the basis of the earlier European decision in Eqiom, establishing that the benefits under the Parent-Subsidiary Directive cannot be limited by means of a general presumption of abuse that transfers the burden of proof to the taxpayer. But the court explained that the Danish conduit cases override, de facto, the settled case law in Eqiom, by softening the classical restrictive approach against general anti-abuse presumptions and being more sceptical in respect of intermediate EU holding companies whose shareholders are not EU-resident.

Beneficial ownership

The court doubted XHL’s beneficial ownership of the dividends. It was held that dividends paid by Z were actually enjoyed by XH through interest payments under the CPECs and that the interest paid to XH entailed disguised dividend distributions.

In reaching this conclusion, the Spanish High Tax Court did not, in our view, adequately address differences in the timing and enforceability of payments under the equity and debt instruments. These are addressed only by way of vague presumptions, based on the economic availability of the dividends, instead of gathering evidence to support, for instance, that the funds were transferred to XH by XHL upon receipt from Z.

A disturbing by-product of the court’s approach is that it paves the way for the Spanish Tax Authority to build assessments on presumptions, without gathering a minimum of evidence to track the flows of the interest / dividends or the capacities of the companies along the chain to enjoy them.

Commercial substance

From the taxpayers’ perspective, evidently these precedents reinforce the need to ensure that proper “substance standards” are met by the EU parent company, although it is arguable whether the substance debate should be added to the analysis of the economic rationale behind a structure. Even more, these “amplified” standards could be considered excessive if we look at the approach traditionally taken by the Spanish General Directorate of Taxes and the OECD on Action 5 Report of BEPS Plan (par. 86) on the issue of which substance is required by a holding company.

The lack of staff and the fact that half of XHL’s directors were employees of a Luxembourg trust service provider undermined the company’s position to claim application of the Exemption in the court’s view.

XHL’s own arguments on the commerciality of the arrangement were almost ignored by the court. XHL had argued that it was incorporated for valid commercial reasons, namely to act as an investment platform for the sovereign fund in the EU. In fact, XHL held assets and had sources of income besides the stake in Z, and XHL’s incorporation in Luxembourg was explained by reference to regulatory arguments. In almost ignoring these arguments, the court cursorily challenges the commercial validity of holding companies as such and their very incorporation as a legitimate business tool.

We hope that this first approach to the application of the Danish conduit cases in Spain is finessed in subsequent judicial stages, at least by limiting the cursory approach with which the Spanish High Tax Court challenges the existence of holding companies. In the meantime, it seems that caution should be exercised and further thought given when implementing these investment structures in light of these rulings.

The Spanish High Tax Court challenges the commercial validity of holding companies and their very incorporation as a legitimate business tool.


avinas, uriamenendez, spanish tax, dividends, withholding tax, cross-border, beneficial ownership, parent subsidiary directive