EU Direct Tax news alert

Background

In April 2014, the CJEU ruled in the Emerging Markets Series of DFA Investment Trust Company case (C-190/12) that, Article 63 TFEU on the free movement of capital applies to dividends paid by companies established in an EU Member State to investment funds established in a non-Member State(the U.S. in this case). Therefore, if the investment fund based in a non-EU/EEA country is able to prove it is comparable to an EU investment fund, and there is a regulatory framework of exchange of information between both countries, any kind of tax discrimination is prohibited.

Based on the CJEU’s judgment, many US investment funds started claim processes in Spain in order to recover the excess of taxation suffered.

In the case decided by the Spanish Supreme Court, in February 2017, the Spanish High Court of Justice of Madrid declared that the dividend WHT taxation applied to the claimant (a U.S. investment fund) was not in breach of EU Law because it considered that the situations were not comparable nor the exchange of information mechanisms in force were enough to verify that the US regulatory framework is equivalent to the Spanish one.

Previous Supreme Court Judgments

In March 2019, the Spanish Supreme Court established that the WHT levied on dividends paid to EU UCITS harmonized under Directive 2009/65/EC was in breach of EU principles of non-discrimination (art. 18 TFEU) and free movement of capital (art. 63 TFEU). Consequently, the Supreme Court granted the refund of the difference between the WHT suffered and the taxation corresponding to a Spanish resident UCITS (1 %), plus late payment interest.

The Supreme Court judgment

Based on the above precedents, the Supreme Court had to decide on two different matters:

(i)   Whether investment funds resident in third countries had to comply with all requirements of Spanish Law on investment funds in order to pass the comparability analysis.

(ii) Whether the existing exchange of information mechanisms with the US are sufficient to check the information provided by the investment funds.

The Court answered the first question by reference to the CJEU case C-190/12, concluding that it is not justified to oblige to the non-resident investment fund to prove the compliance of all requirements of Spanish Law on investment funds in order to pass the comparability analysis. It is sufficient to justify that the investment fund is subject to a regulatory framework equivalent to the EU Directives. Regarding the second question, the Court declared that it is evident that the exchange of information mechanisms with the U.S. are sufficient to check the information provided by the investment fund.