Global tax alert: Spanish tax authorities refuse exemption from withholding tax on the grounds of the general anti-abuse clause

The Spanish tax authorities challenged and denied the applicability of a national exemption for interest payments made by a Spanish tax resident entity to a Dutch tax resident entity on the grounds of a general anti-abuse rule arguing that the entity Dutch did not have enough substance.

In this case, a Spanish tax resident entity received funds (through credit facilities and equity loan agreements) from a Dutch tax resident company acting as lender, the two entities forming part of a group whose parent company was tax resident in the United States. States. The interest payments were considered by the Spanish entity to be exempt for withholding tax purposes, as Spanish law provides that interest payments made to EU tax residents are exempt from tax. non-resident income tax.

The Dutch tax authorities spontaneously informed the Spanish tax authorities that the Dutch lender, qualified as a financial services company, did not comply with the minimum requirements of substance from a national point of view due to the fact that the accounting files and accounts were not physically kept in the country.

Following information received from the Dutch tax authorities, the Spanish tax authorities conducted a tax audit and determined that the Dutch financial services company was a mere conduit entity with no real substance in the Netherlands, acting only as an intermediary between the entity paying the interest and the beneficial owner (the ultimate parent company). This conclusion was reached after considering the following facts:

  • The main objective of the Dutch financial services company was to receive funds from the ultimate parent company and to finance the Spanish entity of the group. In this regard, the flow of principal and interest funds was almost identical between the Spanish entity and the Dutch entity and between the Dutch entity and the ultimate parent, constituting a back-to-back loan.
  • The Dutch entity had no human or material resources, and its head office was provided by a trust office under which 4,200 other financial entities were domiciled.
  • The majority of the Dutch lender’s board members were also board members of the trust office and other financial services entities and the remainder were board members of the parent company.

The Court of Justice of the European Union has ruled in the Danish cases that the beneficial ownership requirement constitutes a material requirement for applying the exemption provided for by European legislation. In this case, the Spanish tax authorities maintain that beneficial ownership, although not expressly provided for in the wording of the law, is an implicit condition for applying the Spanish exemption.

Furthermore, the Spanish tax authorities conclude that a general anti-abuse clause is applicable, since these transactions, considered as a whole, were artificial in the sense that the Dutch financial services company was only a vehicle intermediary without substance or economic activity or valid economic reasons. The lack of human and material resources prevented the entity from exercising any kind of activity apart from simple intermediation. In this respect, it is considered that the only logic of this structure was to obtain a tax exemption which would not have been available if the ultimate parent company had directly granted the funds. Therefore, it is understood that no legal or economic activity supports the financing structure, other than obtaining tax savings.

The practical consequence of the application of the general anti-abuse clause by the Spanish tax authorities is the adoption of a look-through approach, following which the Spanish tax authorities will apply the tax treatment applicable to the beneficial owner of the payments. ‘interests.

This criterion of the Spanish tax authorities is in line with previous interpretations of Danish cases by Spanish tax courts (Central Economic Administrative Court), but opens the door to more uncertainty for multinational financing structures.

Key points to remember

We recommend that multinational groups receiving financing in Spain through EU intermediary lenders review their structures to assess potential alternatives that mitigate the risk that the Spanish tax authorities will deny the withholding tax exemption to source on interest payments.

The application of a general anti-abuse clause not only avoids the possibility of exempt interest payments, but it can also lead to corresponding sanctions and the rejection of mutual agreement procedures.

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