On 19 December 2024, the Court of Justice of the European Union (CJEU) delivered a significant decision in the case of Credit Suisse Securities (Europe) Ltd v. Diputación Foral de Bizkaia. 

The CJEU's ruling on Bizkaia's withholding tax system highlights the need for Spain to reform its tax laws to align them with EU principles of non-discrimination and free capital movement by allowing, in certain cases, the refund of withholding taxes to non-Spanish tax resident shareholders. The decision significantly impacts cross-border investments and may lead to broader tax law consistency across the EU.

Main Legal and Tax Concerns

The central issue in this case was whether Bizkaia's tax rules, which tax dividends differently based on whether they are paid to Spanish tax resident entities or non-Spanish tax resident entities, violate the EU's rules on free movement of capital. Specifically, Bizkaia's regulations impose a withholding tax on dividends paid to non-Spanish tax resident companies, a withholding tax which cannot be refunded even if these companies are loss-making. In contrast, Spanish resident companies can recover the withholding tax in such circumstances. The CJEU examined if this unequal treatment restricts the free movement of capital, as prohibited by Article 63 of the Treaty on the Functioning of the European Union (TFEU).

Although this case directly involves Bizkaia (i.e. an administrative region in the Basque Country, with autonomous tax sovereignty within Spain), its implications extend to Spain's federal tax authorities, as similar laws exist throughout the country. This means that the ruling affects not only Bizkaia but also other regions in Spain. The decision calls for a thorough review and possible reform of Spain's tax laws to align them with EU principles, particularly regarding non-discrimination and the free movement of capital.

Key Findings of the CJEU

The CJEU determined that Bizkaia's tax system, which differentiates between Spanish tax resident and non-Spanish tax resident companies, violates the EU's free movement of capital principles. The court's reasoning included:

• Discriminatory Tax Treatment: The CJEU found that Bizkaia's rules unfairly burden non-Spanish tax resident companies, potentially discouraging foreign investment and hindering capital movement.
• Comparability of Situations: The court noted that Spanish tax resident and non-Spanish tax resident companies are in similar situations regarding dividend taxation in Spain. Any different treatment must be justified by overriding public interest, which Bizkaia failed to demonstrate.
• Rejection of Justifications: The CJEU dismissed Bizkaia's justifications for the tax differences, such as tax collection efficiency, allocation of power of taxation and maintaining a coherent tax system, as insufficient to justify the discrimination.

The ruling applies not only to companies resident in an EU or EEA jurisdiction, but also to entities resident in a third jurisdiction, as long as the relevant investment does not fall under the freedom of establishment principle.

Need for Tax Reform: Refund Mechanism

While the ruling allows Bizkaia to continue levying withholding taxes on dividends to non-Spanish tax resident shareholders, Bizkaia (and Spain) must establish a system allowing the refund of withholding taxes to those non-Spanish tax residents who can prove that they are unable to recover them in their jurisdiction of tax residence. The Bizkaia tax regulations should be amended to regulate that mechanism in accordance with the principles and conditions established by the CJEU. 

This is consistent with the precedent set by the CJEU in Sofina , which led to legislative changes in France. Both cases emphasise that EU Member States must ensure that their tax laws do not unjustifiably place foreign investors at a disadvantage and that they are not discriminatory in violation of the free movement of capital within the EU.

Unresolved Issues

Although the ruling is consistent with EU non-discriminatory principles, it raises various uncertainties and potential discussion points that will require further analysis, such as:

• Evidence of the loss-making position and applicable timeframe: How would the taxes be recovered, and within what timeframe? What evidence should other Member States accept to corroborate tax losses? Which tax expenses should be included? What would happen to expenses that are not tax deductible under the Bizkaia regulations? Should all expenses be included even if they are unrelated to the taxable dividends?
• Additional requirements for non-Spanish tax residents: Should this refund mechanism apply also to recover withholding taxes when the income would have been tax exempt for tax-resident companies under the Bizkaia tax regulations? The ruling could potentially benefit non-resident companies which could face more onerous requirements compared to resident companies (generally justified on anti-abuse grounds).
• Application to other income: Should the mechanism also apply to other types of income subject to withholding tax, such as interest and royalties, due to similar withholding and non-recovery issues in the residence State?

Looking Ahead

In our view, the ruling marks a shift from a more traditional approach, by limiting the sovereign right of source States to tax income which should now consider the taxpayer’s position in the State of tax residence. The ruling should lead to closer examination of tax practices in other EU countries, promoting more consistent tax laws compatible with the free movement of capital principle, which is a cornerstone of the EU’s single market.