On 23 November 2004, the EFTA Court issued a judgment in the E-1/04 (“Fokus Bank”) case, which was then also reinforced by the Grand Chamber of the Court of Justice of the European Union (CJEU) in the C-170/05 (“Denkavit”) case. The cases involved the free movement of capital principle, which precludes any domestic legislation whereby shareholders resident in a specific Contracting Party are granted a tax credit on dividends paid by a company resident in that Contracting Party, whereas non-resident shareholders are not granted such a tax credit. Whether the taxpayer is resident in another Contracting Party which, in a tax agreement with the Contracting Party wherein the dividend is distributed, has undertaken to grant credit for withholding tax, or whether the taxpayer in the specific case actually is granted, or will be granted, credit for the withholding tax, is of no legal significance
These judgments supported thousands of claims filed in Spain by EU/EEA non-resident pension and investment funds which considered that the discriminatory treatment in the final taxation of a Spanish resident fund compared with a non-resident one as a consequence of the dividends contravened EU case law. (Spanish resident funds were taxed at 1% or 0%, depending on the entity, while non-resident funds were taxed at 19%, 18% or 15%, also depending on the existence of a Double Taxation Treaty).
Most of those so-called “Fokus Bank” claims were successful, even when the non-resident funds were forced to go to judicial litigation to win the cases. The Spanish Supreme Court, in a judgment issued on 5 June 2018 (case 634/2017), was also forced to decide which was the correct procedure to be followed for “Fokus Bank” claims filed before 2010, when the Spanish lawmaker approved a reform on article 14 of Non Resident Tax Act. That reform was a result of the infringement proceedings started by the European Commission against Spain as a consequence of this tax discrimination between Spanish funds and EU/EEA non-resident ones.
In the meantime, the CJEU issued several judgments on the free movement of capital (articles 63 and 65 TFEU) such as the “Santander Asset Management SGIIC” (case C-338/11, dated 10 May 2012) and the “Emerging Markets” (case C-190/12, dated 10 April 2014). The CJEU ruled that non-resident investment and pension schemes in third countries (i.e. non-EU/EEA countries) were also discriminated against, and hundreds of US and Canadian funds decided to file protective claims asking for the refund of taxes paid in breach of EU case law, plus late payment interest.
The Spanish tax authorities rejected practically all the claims filed by foreign funds, considering that, for example, the US funds did not prove full comparability with a Spanish resident fund and also hat the US-Spain DTT did not allow a full exchange of information between authorities of both countries. The Spanish tax courts sided with the Spanish tax authorities’ view, and even the lower judicial courts upheld those rejections.
Finally, the Spanish Supreme Court, in a judgment dated 13 November 2019 (case 3023/2018), admitted the appeal lodged by a US fund and therefore approved the “Fokus Bank” claim filed, deciding that the foreign fund was able to prove sufficiently the comparability between the Spanish resident fund and the US fund. Furthermore, the Supreme Court stated that the US-Spain DTT allowed the authorities to share and exchange enough information about the structure of the funds.
Recently, the Spanish Supreme Court has made public that at least ten Canadian pension schemes also have appeals in place regarding their claims filed in Spain. In addition, there is another outstanding appeal before the Supreme Court lodged by a sovereign fund.
In light of the above, non-resident EU/EEA funds should consider filing protective claims in Spain for the periods not statutory barred (October 2016 onwards) in order to safeguard their rights.