Spain - Burden of proof is on tax authorities to show abuse when denying exemption on EU dividends

On 8 June 2023, the Spanish Supreme Court issued its highly anticipated decision in a case involving the application of the dividend withholding tax exemption under the EU parent-subsidiaries directive (PSD) and the anti-abuse rule in domestic law (article 14.1 of the Non-Resident Income Tax Act (IRNR)). In reaching its decision, the court examined the concept of “beneficial owner” in the context of the PSD (even though Spain does not have a beneficial owner requirement in the IRNR). Significantly, the Supreme Court held that the burden of proof for demonstrating abuse when the beneficial owner of the dividends is resident outside the EU and that will result in the denial of the exemption under the PSD is on the tax authorities, not the taxpayer. The court confirmed the decision of the National Court that the PSD applies to exempt from withholding tax dividends paid by a Spanish subsidiary to its Luxembourg parent that is in turn wholly owned by a non-EU investor.

Spain normally requires domestic companies to withhold a 19% tax under the IRNR on dividends paid to nonresident shareholders. However, if the requirements for application of the PSD are met, no withholding tax will be levied on dividends paid between entities resident in EU member states. Spain did not include a requirement that a dividend recipient be the beneficial owner of the dividends when it transposed the PSD into domestic law. However, the country introduced the anti-abuse rule in article 14.1.h, which can result in the denial of the withholding tax exemption on dividend distributions to direct EU shareholders if the majority of the voting rights of the EU parent are held directly or indirectly by persons outside the EU, unless there is a valid economic reason for incorporation of the EU entity.

Background of the case

The case before the Supreme Court arose out of an appeal by the State Attorney’s Office against a declaratory judgement by Spain’s National Court. The National Court ruled in favour of a Spanish resident taxpayer who in 2010, did not withhold tax under the IRNR law on EUR 7 million in dividends paid to its Luxembourg parent company because it took the position that the Luxembourg parent was exempt from tax in Spain under the PSD. The National Court held in favour of the taxpayer and also concluded that that the burden of proof in cases of potential abuse is on the tax authorities rather than the taxpayer.

The Spanish tax authorities had determined that the company should have withheld tax in accordance with the provisions of the Spain-Luxembourg tax treaty and they demanded a tax settlement of EUR 838,754.43. Two factors were key in the tax authorities’ conclusions:

  1. The Luxembourg parent company was a subsidiary of an entity outside the EU (Canada) and therefore, the beneficial owner of the dividends was the Canadian company, not the Luxembourg company; and
  2. Neither the Spanish subsidiary nor the Luxembourg parent were engaged in an actual business activity and appear to have been established purely for tax reasons, given that the Spanish company’s only significant asset was a 5% share in a company listed on the IBEX35 exchange.

The tax authorities invoked the anti-abuse clause of article 14.1.h (lack of economic reasons) in their decision to deny the withholding tax exemption under the PSD, as well as jurisprudence of the Court of Justice of the European Union (CJEU), which issued decisions interpreting the PSD in 2017 and 2019. Those decisions, known as the “Danish cases,” involved the concept of an “ultimate beneficial owner” and its adaptation in light of the anti-abuse clause, given that, in the cases before the court, profits were distributed by Danish affiliates to intermediary companies in Luxembourg and Cyprus, which were investees of non-EU entities. In its decision, the CJEU offered some guidance on when an arrangement would give rise to “abuse,” such as where the funds are on-distributed in whole or in part shortly after receipt or if the recipient lacks substance and was interposed in a structure only for tax purposes, etc.

From this stems the importance of the beneficial owner concept because for the Spanish tax authorities, it was not the entity with an address in the EU but the “ultimate” parent company that was behind the “chain,” which is why they were quick to invoke the anti-abuse clause. The Spanish tax authorities reasoned that if the beneficiary of a dividend is resident in a third country, denying the withholding tax exemption under the PSD does not require evidence of fraud or abuse, and the anti-abuse provision should apply automatically without any further evidence.

Supreme Court decision

The Supreme Court disagreed with the approach of the Spanish tax authorities. The court concluded that the tax authorities cannot presume an artificial arrangement or abuse where an EU company is controlled by a non-EU entity—the burden of proof is on the tax authorities to demonstrate that the requirements for application of the anti-abuse clause are met. To meet this burden, the tax authorities may have to resort to the mechanisms for exchanging information as set out in Spain’s tax treaties and/or the EU Information Exchange Directive (DAC).

However, based on CJEU’S case law, the legal entity receiving the dividends must demonstrate to the payer that that the recipient is, in fact, the beneficial owner for the exemption to apply. In the instant case, the Spanish entity did show that its Luxembourg parent company was the beneficial owner, and if the tax authorities wanted to apply the anti-abuse clause, they should have resorted to the mechanisms in the applicable tax treaty and the DCA to establish that the beneficial owner was not the EU entity.


The most prudent option for taxpayers is to have a good “defence file” that clearly demonstrates the economic motive for the relevant structure and activities (i.e., the “substance”) and that the ultimate beneficial owner is an EU-resident entity. This is true not only because of the CJEU’s case law but also because one of the objectives of the Spanish Presidency of the European Council during the second half of 2023 is to promote a regulatory proposal that would establish new criteria on transparency and information on beneficial owners, particularly when the beneficial owner is located in one of the jurisdictions identified by the EU as non-cooperative. This will provide the tax authorities of the EU member states with an instrument that potentially could facilitate the need for abuse to be demonstrated by the authorities as required by the Spanish Supreme Court.


Antonio Puentes Moreno
BDO in Spain

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