Spain: Financing structure challenged, tax authorities look through Dutch entity to impose withholding tax on US entity

Application of the Spanish GAAR to the domestic withholding tax exemption on interest paid to a company

Tax authorities look through Dutch entity to impose withholding tax on U.S. entity

The Spanish tax authorities issued a ruling—Norma: Conflicto nº 4 (November 2021)—on application of the Spanish general anti-abuse rules (GAAR) to the domestic withholding tax exemption on interest paid to a company resident in an EU Member State.

The ruling concludes that a U.S. entity was the real lender and beneficial owner of the Spanish-sourced interest, and that the interest income was not exempt from withholding tax.

Read Conflicto nº 4 (Spanish) [PDF 790 KB]

Summary

Spanish-sourced interest income is exempt from Spanish non-resident income tax, provided that the lender receiving the interest is a resident in an EU Member State.

However, as noted in the ruling, the Spanish tax authorities can challenge the application of the withholding tax exemption under any of the GAAR clauses, pursuant to Spanish tax law and based on a “beneficial owner” approach—notably since the judgments of the Court of Justice for the European Union (CJEU) in the so-called “Danish cases” (C-115/16, C-118/16, C-119/16, and C-299/16).

In particular, the ruling analyzes a structure whereby a U.S. company loaned funds to a company located in the Netherlands, which, in turn, granted the same funds to a Spanish company through a loan.

The Spanish tax authorities—following the Spanish GAAR clause “Conflict in the application of the tax law” (Article 15 of the Spanish general tax law)—challenged the taxpayer’s position and asserted Spanish withholding tax on the payments made to the Dutch entity on the basis that, economically, the U.S. entity was the real lender and, thus, the beneficial owner of the Spanish-sourced interest. In other words, the Spanish tax authorities “looked through” the Dutch entity and considered that the interest paid was subject to Spanish withholding tax at the tax rate contained in the income tax treaty between Spain and the United States. [Note that the year at issue referred to a period during which the current Spain-United States income tax treaty was not applicable, and that the withholding tax rate was considered under the then-applicable Spain-United States income tax treaty—that is, the treaty in effect at that time.]

KPMG observation

The ruling demonstrates that there may be circumstances when the Spanish tax authorities may look through the EU entities on the basis that there is an “assimilation” in the financing of Spanish companies by EU entities.

The Spanish tax authorities could (from the date of publication of the ruling) impose penalties on those Spanish taxpayers paying interest to EU companies that are not deemed to be the beneficial owners of such interest—much like the situation in the ruling described above.

Accordingly, potentially affected taxpayers need to review their current financing structures when non-EU groups invest in Spain and when interest is being paid to other EU companies, and need to determine whether there is a withholding tax risk in connection with the interest paid from Spain, including potential penalties. In some instances, taxpayers may need to consider taking certain steps to avoid or, at least, to mitigate the tax risk.
 

For more information, contact a KPMG tax professional in Spain:

Manuel Rodriguez Ortega | +34 630 38 5990 | manuelrodriguez3@kpmg.es

 

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