Lessons learned from Spain’s denial of withholding tax exemption on interest payments to EU residents based on GAAR – MNE Tax
By Ramon Bonell, Associate Professor, Complutense University of Madrid
On December 16, 2021, the Spanish tax authorities challenged the exemption from national withholding tax on interest paid to EU residents based on the application of the General Anti-Abuse Rule (GAAR), on the grounds that the beneficiary of the interest was a conduit entity and not the beneficial owner of the income. This decision came shortly after the opening of a tax audit procedure following a spontaneous exchange of information by the Dutch tax authorities.
Each category introduces an aspect to be considered in the conduct of each related operation, such as quantity, quality, relationships, activity, influences, place and time.
The categories are designed to answer the question of what is the reality of the substance behind each operation. They include the identification of each operation along with a statement of its purpose, as well as specific data on who performs the operation. The clear objectives of each operation should also be noted.
The parties involved in the transaction should also be listed, as well as the location and any other facts affecting the economic activity, including the characteristics of the service provided or the goods to be transferred.
It is important that all quantitative and qualitative details are included as well as all measurable aspects, as well as any contrast with other goods or services provided. Any relevant class or kinship relationship should be noted.
To benefit from the tax advantages provided for by Directive 2003/49, the entity receiving the interest must fulfill the conditions provided for by this Directive. However, as the Danish Government indicates in its observations, it may happen that groups of companies which do not fulfill these conditions but which interpose, between the company which pays the interest and the company which will dispose of it, one or more companies which meet the formal requirements of that directive. The questions raised by the referring courts concerning the abuse of rights and the notion of beneficial owner have arisen with regard to such financial arrangements.
It is relevant in this respect that financing by own resources, capital and equity, be used for the loan, in defense of the common interest. That the interest in question accumulates on the capital; that the beneficiary of the investment subsequently carried out an intra-group transfer to its parent company resident in the same State with a view to the tax consolidation of the results in accordance with the rules in force in that State; that the interests in question are subsequently converted into capital of the borrowing company; and, finally, that the majority of the persons whom the State of residence of the debtor of the interest considers to be the beneficial owner of the interest are legally or contractually obliged to transfer the interest to another person; the creditor of the interest is legally or contractually obliged to transfer the interest to another person; and, finally, most of the persons whom the State of residence of the payer of the interest considers to be the beneficial owners of the interest are residents of other Member States or of third countries with which the Kingdom of Denmark has concluded a double taxation agreement , so that under Danish law there would have been no withholding tax if these persons had been the lenders and therefore received the interest directly from the interest payer.
Proof of an abusive practice requires, on the one hand, a set of objective circumstances demonstrating that, despite formal compliance with the requirements established by Union law, the objective pursued by that law has not been achieved and, on the other hand, a subjective element consisting in the desire to obtain an advantage deriving from EU law by artificially creating the conditions necessary for obtaining it. The concordance of a certain number of indices can prove the existence of an abuse of right, if they are objective and concordant. Such indications may consist of the existence of securitization vehicles without economic justification, as well as the purely formal nature, the structure of the group of companies, the financial transactions and the loans.
This means that a Member State must refuse to rely on provisions of EU law when they are invoked, not to achieve the objectives of the provisions in question, but to obtain an advantage under EU law. Union, even if the conditions laid down in this regard are met only formally.
Ramon Bonell is associate professor at the Complutense University of Madrid.