Global Tax Alert | 5 December 2013

Spanish Supreme Court extends domestic tax credit to transfer of shares by EU residents

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In a recent decision, the Spanish Supreme Court has allowed the application of a tax credit to avoid double taxation, provided in the Spanish tax law for Spanish resident entities only, to capital gains derived by EU (European Union) resident entities from the transfer of shares in Spanish entities.


When a Spanish resident entity transfers the shares of a Spanish resident subsidiary, the capital gain is taxable at the standard corporate income tax (CIT) rate.1 However the transferor may apply a tax credit to avoid double taxation equal to the tax rate times the amount of the subsidiary's undistributed retained earnings generated during the holding period. The requirements for the credit to apply are, generally, that the parent entity holds a minimum 5% in the subsidiary's share capital, and that such participation has been uninterruptedly held during the year prior to the transfer.

Conversely, nonresident entities that transfer the shares of a Spanish subsidiary are generally taxable in Spain on the gross capital gain at standard rates,2 without the possibility to apply any relief from double taxation. It is important to note that these gains, when derived by EU resident entities, are not taxable in Spain, except where the entity mainly owns real estate located in Spain, directly or indirectly, or when the EU entity has held 25% or more of the equity of the Spanish subsidiary at any time during the 12-month period prior to the transfer. Also, most of the tax treaties entered into by Spain protect non-Spanish tax residents from taxation on the gain derived from the transfer of shares in Spanish entities.

The case

In 2002, a French entity transferred the shares of its Spanish subsidiary at a gain. The tax treaty concluded between Spain and France states that the transfer of shares of a Spanish subsidiary by a French resident can be taxed in Spain if the French resident has held, at any time during the 12-month period prior to the transfer of the shares, at least 25% of the equity of the Spanish subsidiary.

The French entity paid the relevant Spanish tax on the gain and thereafter filed a refund claim with the Spanish Tax authorities equal to the difference between the amount paid and that which results after applying the above-referred (domestic) tax credit. The French entity argued that the Spanish rules governing taxation of capital gains derived by non-Spanish resident entities are discriminatory, because a Spanish resident entity would have been entitled to apply a tax credit, whereas such tax credit is not available to a nonresident transferor.

The tax authorities denied the refund claim; after the dismissal of the appeals filed by the taxpayer with the different Spanish tax courts and courts of justice, the case was brought to the Supreme Court, which has ruled in favor of the taxpayer.

When determining whether the Spanish domestic provision governing the taxation of capital gains by nonresident entities is against a European fundamental freedom, the Supreme Court followed the analysis generally conducted by the European Court of Justice. First, it determined that the non-Spanish resident and the Spanish resident subjects are in a comparable position and that the non-Spanish resident is given a tax treatment which is less favorable than that applied to the Spanish resident. Further, it confirmed that this difference in tax treatment cannot be explained by an objective difference. As a result, the Supreme Court confirmed that the questioned rules are against the EU free movement of capitals.

Impact of the decision

When the tax suffered by an EU resident shareholder on the transfer of shares of a Spanish subsidiary exceeds the tax that would have been due should the transferor be a Spanish resident, the former could be seen as suffering a discrimination against the EU principle of free movement of capitals. As a result, multinational groups planning to transfer the shares of their Spanish subsidiaries held by an EU parent entity should conduct a comparability analysis to ensure that the taxation that is imposed on the EU parent is not greater than that which would correspond to a Spanish transferring resident. Although the current tax rate applicable to nonresidents (21%) is lower than the current CIT rate (30%), there could still be situations where such discrimination could occur.

Further, EU parent entities that have transferred shares in a Spanish subsidiary within the last four years,3 and that have paid the corresponding tax in Spain, should review if they have been subject to a higher tax in Spain than that which would have corresponded to a Spanish transferring resident. Should this be the case, they should immediately assess the possibility of filing a refund claim of the tax paid in excess.

The European Court of Justice has acknowledged the application of the EU principle of free movement of capitals to third countries, as dictated by the Treaty on the Functioning of the European Union; as a consequence, the above rationale could potentially be extended to non-EU shareholders that plan to transfer or have transferred their participation in a Spanish resident entity and that do not benefit from a tax treaty with Spain that offers adequate capital gains tax protection (most significantly, but not exclusively, the United States).

Similarly, based on the argument upheld by the Supreme Court, any parent entity that is resident in a country with which Spain has concluded a double tax treaty could argue the application of this doctrine based on the treaty principle of non-discrimination.


1. The current CIT rate was set at 30% starting on 1 January 2008. It was 35% through 2006 and 32.5% in 2007.

2. The Non Resident Income Tax rate was 35% through 2006; 18% from 2007 to 2009; 19% in 2010 and 2011; and 21% in 2012 onwards.

3. The Spanish statute of limitations period is four years from the filing of the relevant tax return.

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

Ernst & Young Abogados, Madrid
  • Maximino Linares
    +34 91 572 7123
  • Laura Ezquerra
    +34 91 572 7570
  • José Luis Gonzalo
    +34 91 572 7334
  • Iñigo Alonso
    +34 91 572 5890
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM4017