Global Tax Alert | 8 July 2013

EU commission requests Spain amend its rules governing international double taxation relief

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The EU Commission has requested that Spain amend its rules governing the methods that provide relief from double taxation applicable to income from foreign subsidiaries. The Commissions contends the Spanish rules are more burdensome than the rules which apply to dividends received from Spanish tax resident subsidiaries.

Detailed discussion

The EU Commission recently announced (MEMO/13/583, published on 20 June 2013) that it has formally requested that Spain amend its domestic provisions governing the methods that provide relief from double taxation on income derived from foreign subsidiaries as they set forth requirements for this foreign income to be exempt which are more burdensome than those required for domestic dividend income to benefit from a full tax credit.

Under Spanish legislation, dividends received by a Spanish entity from another Spanish resident entity enjoy a full tax credit (similar to an exemption), provided, generally, that the entity receiving the dividend has held at least 5% of the share capital of the entity paying the dividend for a one-year period.

Spanish legislation provides for two alternative methods to avoid double taxation on income from foreign subsidiaries: the participation exemption regime and a credit system.

In the case of the participation exemption regime, the Spanish shareholder may benefit from an exemption on income from a foreign subsidiary if, briefly, in addition to the above-referred minimum share capital percentage and holding period thresholds, the foreign subsidiary derives at least 85% of its income from activities conducted outside Spain, and, the income put of which the dividend is paid has been subject to effective corporate taxation.

Taxpayers may elect to apply a tax credit to avoid the double taxation in respect dividends from a foreign subsidiary in lieu of the participation exemption regime. The tax credit is equal to the lower of (i) the foreign tax effectively paid abroad on the income or (ii) the Spanish tax due on the income received. This regime only requires a 5% minimum participation and a one-year holding period thresholds.

Although the Commission's request is not explicit on the arguments on which its demand is based, there are indications that it may be grounded on the interpretation that imposing the above-listed additional requirements to grant relief from international double taxation may be deemed to constitute an infringement of the EU freedoms of establishment, provision of services and of movement of capital.

This request takes the form of a reasoned opinion. Spain has been given a two-month deadline to amend the Spanish rules. If this request is unattended, the EU Commission will then refer the case to the European Court of Justice.

Spanish multinationals and foreign groups with structures including Spanish holding companies should closely monitor this procedure as it may bring changes to Spanish domestic legislation governing the systems to avoid international and / or domestic double taxation.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid
  • Laura Ezquerra
    +34 91 5727 570
  • Alfonso Puyol
    +34 91 5725 010
  • Jose L. Gonzalo
    +34 91 572 7334
Ernst & Young LLP, Spanish Tax Desk, New York
  • Inigo Alonso Salcedo
    +1 212 773 8692

EYG no. CM3610