The Spanish Supreme Court has recently admitted a claim regarding withholding tax (“WHT”) on dividends paid by Spanish listed companies to EU hedge funds. These EU hedge funds have requested a WHT refund because they have borne a WHT higher than the one that would have been applicable to comparable Spanish collective investment undertakings.
In this regard, the Spanish Supreme Court will determine under which law the comparability analysis between non-Spanish hedge funds and Spanish collective investment undertakings for applying Article 63 of the Treaty on the Functioning of the European Union has to be carried out. This would be relevant to confirm if the WHT rate applicable to dividends paid by Spanish listed entities to non-Spanish hedge funds is the same that would apply to comparable Spanish collective undertakings (i.e. 1% instead of the regular WHT rate). This is because it is not a clear-cut issue if such analysis has to be made under the Spanish domestic law or under the legislation applicable to the hedge funds in their State of residence or origin.
Another point to be confirmed by the Spanish Supreme Court is which parameters should be considered for the purposes of the comparability analysis. Specifically, if the existence of prior authorization of the incorporation of the non-Spanish hedge fund, its maintenance over time, number of unit-holders, minimum net worth or share capital, its open-ended nature, the purpose of the investments, risk-diversification and taxation-deferral by the fund should be taken into account.
It will be also clarified who bears the burden of proof regarding the fulfilment of the requirements of comparability. Specifically, who has to proof that the discriminatory treatment has been neutralized by the application of a convention for the avoidance of double taxation, which determines that the non-Spanish hedge fund has been able to deduct in its State of residence the taxation borne in Spain.
This result of this future judgement should be monitored to confirm if it is in favour of the hedge funds’ position. If such were the case, it would be possible to request the refund of WHT on dividend payments borne by non-Spanish hedge funds, through the general procedure (i.e. filing an amended version of the relevant tax return) or through the Spanish State liability regime.
In this regard, the recent CJEU judgement dated June 28 2022 that has declared Spain’s rules on State liability contrary to EU law would imply that the right to take legal proceedings to request the refund of WHT could be revisited.
According to this CJEU judgement, the Spain’s rules on State liability can no longer limit the right to request the State liability to situations where the CJEU has declared the rules being applied contrary to EU law, among other requirements, which are no longer valid. Therefore, if the Spanish Supreme Court rules in favour of the hedge funds’ position, two routes could be opened for requesting the refund of WHT on dividend payments made to non-Spanish hedge funds.
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