Withholding taxes on interest payments to non-resident taxpayers and general Spanish anti-evasion rule. Report dated December 2021 from the Spanish Advisory Commission
On December 16, 2021, the Advisory Committee published its report on an anti-abuse case presented by the Spanish tax control authorities. The case concerns financial structures within international groups, with special purpose entities located in the European Union but whose ultimate headquarters are outside the Union. In this report, the advisory commission accepts the criteria established by the European Court of Justice in the “Danish cases” and considers that the anti-abuse beneficial ownership clause is a material requirement. As such, compliance with the beneficial ownership clause is a necessary condition to benefit from the national withholding tax exemption on interest paid to an EU resident entity.
The case to which the report refers is that of an international group, where a Dutch subsidiary grants a loan to the Spanish subsidiary. The problem arises because the Spanish entity does not withhold Spanish tax on interest payments to the Dutch lender based on the national exemption established in article 14.1.c) of Spanish income tax non-residents (“NRIT“) To act.
This exemption applies to interest from Spanish sources paid to taxpayers residing in the EU. Unlike Council Directive 2003/49/EC (the Interest and Royalties Directive), there is no reference to a beneficial ownership clause in the literal wording of the national exemption.
The Advisory Commission nevertheless supports the approach adopted by the Spanish tax authorities and, through an analysis of fourteen elements of the group’s system, considers that the final recipient of interest income – and therefore its beneficial owner – is not the Dutch lender, but rather a US resident company, parent of the Dutch and Spanish subsidiaries.
As an example of the fourteen items analysed, the report notes the fact that the lender is domiciled in a trust office in the Netherlands, where thousands of other companies are also domiciled. Trust office employees are appointed directors of the subsidiary. Additionally, the report also mentions the fact that the financing of the group is structured through back-to-back loans, where the only role of the Dutch subsidiary is to receive loans from its parent company and lend these funds to the Spanish subsidiary. The amount of interest income received from Spain equals the finance charge paid to the US parent company.
On this analysis, the Advisory Committee concludes that the operation was created with a purely fiscal objective and, therefore, constitutes an abuse that triggers the general Spanish anti-tax evasion rule, under Article 15 of the Tax Law Spanish general.
The Advisory Committee is therefore in favor of refusing the exemption, on the grounds that the beneficial owner of the income is a non-EU resident entity. The advisory committee also considers that the role of the Dutch subsidiary is that of a simple intermediary between the Spanish subsidiary and the American parent company. The Advisory Committee disregards the fact that, as noted above, Article 14.1.c) of the Spanish NRIT Law does not contain any express reference to the beneficial ownership clause.
Therefore, in the absence of the national exemption provided for in Article 14.1.c) of the Spanish NRIT law, the taxation of such interest income must be reviewed in the light of the double taxation agreement between the Spain and the United States and the agreement provides for a reduced withholding rate of ten%.
Until now, the Spanish tax authorities considered the beneficial ownership clause as an anti-abuse mechanism outside the scope of Article 14.1.c) and used this clause as an additional tool to examine financial structures. The beneficial ownership clause was not considered an implicit and specific requirement of the national exemption from withholding tax on interest payments. The Advisory Committee therefore gives this clause the same relevance as if it were literally included in the wording of the law, based on the “Danish cases” where the European Court of Justice took the same position with regard to exemptions from the EU.
In addition, two other procedural issues that gave rise to the Advisory Committee’s report should also be highlighted. First, a tax audit procedure in Spain was triggered following an automatic exchange of information by the Dutch authorities. Under Dutch law, the exchange of information is mandatory when a financial services entity resident in the Netherlands does not meet the national substance criteria.
Second, the beneficial ownership clause is an anti-abuse mechanism, like the general Spanish anti-tax avoidance rule, under Article 15 of the Spanish General Tax Law. However, the Spanish general anti-tax evasion rule works as an indirect tool, since, to be applied, it requires a prior favorable report from the advisory committee.
The invocation of the beneficial ownership clause creates a procedural precedent for all such cases, where the tax authorities may consider that an intermediary company has been formed for the purpose of obtaining a tax advantage pursuant to Article 14.1.c) of the Spanish NRIT law. In addition, in the case of a financial services entity resident in the Netherlands, national rules for spontaneous exchange of information mean that it may not be necessary to carry out heavy auditing activities. cross-border from the Spanish tax authorities.
It should also be noted that the publication of the report of the advisory committee would allow the Spanish tax authorities to impose sanctions on financial structures such as the one under consideration. Thus, under Spanish law, any tax levied as a result of the application of the general Spanish anti-tax evasion rule may result in a penalty of up to 50%, provided that the operator in the controlled case can be considered as substantially equal published administrative guidelines (Article 206 bis.2 of the Spanish General Tax Law). It remains to be seen whether this “substantially equal” condition would require the cases reviewed to meet all fourteen elements analyzed in the report or whether meeting only some of them will suffice.
The publication of this report, together with other initiatives, such as the proposal for a directive to prevent the misuse of shell entities for tax purposes, published by the European Commission on December 22, 2021, highlight the trend to combat and penalize financial structures, with corporate intermediaries, lacking in substance and created to benefit from tax advantages.
In this context, taxpayers should pay attention to the new rulings. If the position of the Advisory Committee were confirmed, the financial structures with agents such as the one described in the report would have to be reviewed.