Dividend Refund, a Spanish firm specialising in claims for excess international withholding on dividends and coupons, warns that the refund is not automatic. It will be necessary to check whether the tax credit provided for in the double taxation agreement effectively neutralised the difference in taxation, which requires a case-by-case analysis to determine whether there is discrimination.
The Court of Justice of the European Union (CJEU) issued a ruling on 17 September regarding the taxation of dividends received from Spanish companies by foreign investment funds. The court concludes that taxing a non-resident fund more than a comparable Spanish fund may be contrary to EU law on the free movement of capital if the double taxation agreement does not effectively compensate for that difference.
"The ruling indicates that there may be a differential treatment when a foreign fund bears a higher tax than that of a comparable resident fund. The key is to determine whether that difference is actually neutralised in the country of residence through the agreement and the corresponding tax credit," explains Antonio Alonso, an international tax specialist at Dividend Refund.
The ruling responds to a preliminary ruling from the Supreme Court in the litigation between the Treasury and a US iShares fund, concerning the dividends from Spanish companies it received between 2007 and 2010. During that period, the fund was taxed at 15% on those dividends, compared to 1% that resident collective investment institutions in Spain bore.
The CJEU clarifies that the compensation must be real and not just theoretical. In the analysed case, the fund did not pay taxes in the United States on those dividends, as it distributed them to its participants, and therefore could not take advantage of the deduction provided for in the agreement. It is now up to the Supreme Court to verify whether the participants were able to effectively use the tax credit to fully offset the difference in taxation borne in Spain.
"It is not enough for there to be a formal mechanism for deduction or tax credit. It must be verified whether it can be effectively used to offset that differential treatment," adds Alonso. "That is why the analysis must be done on a case-by-case basis. Even funds resident in the same country may be in different situations depending on their tax regime and their ability to take advantage of the credit."
The ruling does not affect harmonised investment funds domiciled in other countries of the European Union or the European Economic Area, such as Luxembourg or Ireland, because Spanish law already applies the same 1% taxation to them as to Spanish funds. The impact is concentrated on funds domiciled outside that scope. Among the main jurisdictions with investments in Spanish companies, the double taxation agreements set a withholding tax on dividends of 15% for the United States, Switzerland, Canada, 10% for the United Kingdom, and 5% for Japan.
To gauge the impact, Dividend Refund has analysed the case of one of the funds from a large US manager with investments in Spanish companies. According to estimates, that fund, which was taxed at 15% on dividends, could claim about 10 million euros per year from the Tax Agency. Since the deadline for claiming is four years, if it has not yet done so it could recover up to four years, which would bring the total to around 40 million euros if the volume of dividends was similar each year.
