Spanish Dividend Tax 'Discriminatory'

by Ulrika Lomas, Tax-News.com, Brussels

08 June 2010

The European Court of Justice (ECJ) has upheld the European Commission's contention that Spain's treatment of domestic and foreign shareholders under its participation exemption regime contravenes article 56 of the EC Treaty on the free movement of capital.

In European Commission v Kingdom of Spain (C-487/08), the thresholds for exemptions from taxes on dividends paid by a Spanish company were under dispute; these differ depending on whether the recipient of the dividend is a Spanish company or a non-resident company. For a Spanish company, it must have a holding of 5% or more in the company paying dividends in order to enjoy exemption from tax, but in respect of non-resident companies, the threshold is higher - originally 20% but reduced to 10% in 2009.

Spanish government arguments that the treatment of non-resident companies was not necessarily unfavourable because the tax treatment could be offset in the recipient's country through double taxation treaty terms, were rejected because this was not always the case; limits were imposed by some treaties on the amount that could be deducted or offset, and if dividends were not taxed, or were insufficiently taxed, in the company's country of residence, the amount withheld in Spain may not be wholly deductible.

The ECJ upheld the Commission's view that a "member state could not shift its obligation to comply with the obligations imposed on it by Treaty to another member state and rely on the other state to make good the discrimination".

The ECJ contended that the information regarding dividends distributed to companies established in the EFTA (European Free Trade Association) states was insufficient, such that it could not "determine precisely the scope of the infringement of Article 40 of the European Economic Area Agreement allegedly committed by the Kingdom of Spain". Accordingly, a complaint relating to the infringement of Article 40 of the EEA Agreement was dismissed and the judgement relates solely to infringements of article 56 of the EC Treaty.

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