The Spanish Supreme Court has recently ruled regarding withholding tax (“WHT”) on dividends paid by Spanish listed companies to EU hedge funds. These EU hedge funds requested a WHT refund because they had borne a WHT higher than the applicable to comparable Spanish collective investment undertakings.
Through these judgements, the Spanish Supreme Court has confirmed that the Spanish legislation violates the principle of the free movement of capital established by Article 63 of the Treaty on the Functioning of the European Union. This is because the Spanish legislation does not include a specific mechanism or the requirements that shall be met by the non-Spanish hedge funds to be taxed like the comparable Spanish collective investment undertakings.
The Spanish Supreme Court has stated that, if a non-Spanish hedge fund claims that the infringement of the principle of the free movement of capital has occurred, the first step is to verify if such hedge fund is comparable to a Spanish collective investment undertaking. However, no harmonising regulation applicable to non-Spanish hedge funds can be used as reference for a comparability analysis. Therefore, the Supreme Court has ruled that the comparability analysis does not have to be made under the exact requirements established by the Spanish domestic law but considering its purpose as well as the subject and content.
The specific elements that have to be verified to confirm the comparability, which have been identified for the first time, are the following:
- Open-ended nature: the non-Spanish hedge fund shall be accessible to the public (i.e. not mere portfolio entities addressed to manage personal or familiar assets or restricted to certain collectives as employees of a company). This nature is not undermined if the access is limited to professional/qualified investors or to a minimum investment amount.
- Authorization: the non-Spanish hedge funds shall have an authorization in force issued by the financial regulatory authorities supervising these hedge funds in its country of residence.
- Management: the non-Spanish hedge funds shall be managed by an entity authorised in its country of residence as Alternative Investment Fund Manager under the Directive 2011/61/EU.
The burden of proof corresponds to the non-Spanish hedge funds. However, if the requirements detailed above are proved, the burden is transferred to the Spanish Tax Authorities. Additionally, the neutralization of the discriminatory treatment through the application of a convention for the avoidance of double taxation will only be deemed as met when it allows deducting the taxation borne in Spain in its State of residence.
Therefore, non-Spanish hedge funds that have borne WHT over 1% on dividends received from Spanish listed entities will have the right to request the refund of the excess of WHT when the requirements above are met.
Andrés Máiz
Senior Associate – Tax Department
