Since the Danish conduit cases, the Spanish tax authorities have used the beneficial ownership concept to deny the application of withholding tax exemptions, especially where dividends or interest are paid to an entity resident in another EU country but controlled by a non-European multinational group or institutional investor, and they continue to do so irrespective of two decisions that should have narrowed the interpretation and application of the beneficial ownership concept.
The National Court previously concluded (see judgments 2467/2021, 3097/2021 and 2804/2021) that the tax authorities cannot deny the Parent-Subsidiary exemption merely because the ultimate owner is a non-EU entity without providing even prima facie evidence of the absence of economic reasons (see this earlier post for details). The Spanish Supreme Court has recently confirmed the National Court’s interpretation and concluded that the tax authorities would need to prove the existence of abuse of law to apply the specific anti-abuse rule included in the EU directive (see this earlier post for details). Similarly, the Spanish Supreme Court had previously criticised the tax authorities’ denial of benefits under the double tax treaty between Spain and Switzerland on the basis that the recipient was not the beneficial owner of the payment when the tax treaty did not include a beneficial ownership test (case number 1996/2019).
Yet, it appears that the Spanish tax authorities continue to argue that the beneficial ownership test must be met in order to access at least EU-derived exemptions from withholding tax. They recently published a report under the Spanish “conflict in the application of law” GAAR (which bites broadly where a tax saving is achieved through artificial or improper arrangements). The report covered a situation in which the interest withholding tax exemption was disallowed due to the lack of compliance with the beneficial ownership test and may allow the imposition of penalties in the future.
Based on the CJEU’s reasoning in the Danish conduit cases, the Spanish tax authorities consider that a company is not the beneficial owner of the income it receives if it acts as a mere conduit, i.e. if it does not have the right to enjoy or use the income (either contractually or de facto) and acts on a back-to-back basis and makes no (or only an insignificant amount of) profit. When applying these criteria, the Spanish tax authorities would normally look at this from an economic perspective by analysing the fund flows within the structure, considering in particular whether there is an automatic distribution of funds.
Challenges are most likely where an EU-resident recipient of Spanish income or dividends is controlled by a non-European multinational group or institutional investor. If the recipient of the relevant payment is not also the beneficial owner, the Spanish tax authorities would consider this sufficient to disapply exemptions derived from the EU Directives, even if the true beneficial owner has not been determined and there is no fraud or abusive intention and, arguably, even if the EU entity has a business rationale or substance.
If, in such circumstances, the beneficial owner can be identified, the Spanish tax authorities should permit a look-through approach, for example, so as to grant any exemption available under a double tax treaty between Spain and the country where the beneficial owner is resident, but it is unclear whether they would take this approach in practice. The Spanish Supreme Court previously (in the above-mentioned case number 1996/2019) criticised the Spanish tax authorities (and the National Court) for denying benefits under the Spain/ Switzerland treaty on the basis that the beneficial owner was resident in the US, and then also denying the application of the Spain/ US treaty.