New rules for dividends distributions by Spanish companies to their UE shareholders

New rules for dividends distributions by Spanish companies to their UE shareholders

The tax on dividends in Spain depends on various factors. In first place, it depends if the shareholder is a company or an individual. Secondly, it depends if the shareholder is resident or non-resident. In this article we will refer to dividends paid by a Spanish company to other company which is resident in the European Union (“UE”).

To know more, read our article about the Income Tax in Spain to learn how are taxed dividends paid to an individual who is resident in Spain

As a general rule, dividends distributed by Spanish entities to other entities resident in the European Union with a participation of at least 5%, will not be subject to taxation in Spain. However, the Spanish rule states has an anti-abuse clause; hence,  the exemption will not apply when the recipient entity is directly or indirectly controlled by one or more entities or persons resident in non-EU Member States, unless the tax payer gives enough evidence that the structure does not have as its main objective (or as one of its main objectives) to benefit from the exemption. Therefore, the burden of proving the existence of a valid business purpose for the corporate structure is placed on the taxpayer.

On 7 September, the European Court of Justice (ECJ) issued its judgment in Case C-6/16 (Eqiom and Enka), which could have a deep impact in the taxation of dividend distributions by Spanish entities to other EU parent companies which, in turn, are directly or indirectly owned by non-member shareholders. Although this judgment does analyze the French legislation, the similarities between the two suggest that the Court’s conclusions on French law could also be projected on the Spanish one. That is, like the Spanish rule, the French law requires that the corporate structure has a valid economic purpose and places the proof of the existence of such economic purpose on the side of the taxpayer.

In this respect, the EU Court has held that the French legislation is contrary to the purpose of the Directive and constitutes an undue restriction on freedom of establishment.

Specifically, the Court considers that the derogation from the general rule of exemption from dividends between Member States of the Union must be interpreted restrictively and the application of the exemption can only be excluded in cases where fraud or actual abuse is detected. For that reason, the French legislation, which establishes a general presumption of fraud or abuse, is contrary to the Directive.

Moreover, the Court adds that, to exclude the application of the exemption, the Administration cannot require the taxpayer to prove the valid economic motive of the corporate structure, but is the Administration which must prove that the corporate structure is artificial and is has not have a valid business purpose.

Given the similarities between French and Spanish law, it seems evident that the conclusions of the Court’s judgment should also apply to Spanish law.

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