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July 2, 2021

Spanish National High Court overturns denial of withholding tax exemption on dividend payments to EU shareholder

Executive summary

The Spanish National High Court issued a Decision on 25 May 2021 (the Decision), recently published, upholding the withholding exemption for dividend payments (DWHT) by a Spanish company to a Luxembourg company. This decision overturns the criteria of the Spanish tax authorities, which had rejected the withholding exemption on the basis that the latter is not incorporated for valid business reasons.

The Spanish implementation of the European Union (EU) Parent-Subsidiary Directive includes a special anti-abuse rule with certain safe harbors, one of them being that the parent entity may prove that it has been set up with a sound business purpose and not to unfairly benefit from the DWHT exemption.

The Spanish tax authorities rejected the DWHT exemption applied in years 2009 and 2010 based on a presumption of tax avoidance.

Following the European Court of Justice (ECJ) case law on the burden of proof, the Spanish National High Court overturned the decisions of the Spanish tax authorities and lower tax courts: the Spanish tax authorities may not set a general presumption of abuse but rather they have the task of establishing the existence of elements constituting such an abusive practice in the case under analysis.

Detailed discussion


The Spanish tax authorities, through an audit, had rejected the DWHT exemption applied by a Spanish company, as withholding agent, in respect of dividends distributed to its Luxembourg shareholder (LuxCo) in years 2009 and 2010. LuxCo was wholly-owned by a Canadian pension fund.

The Spanish tax authorities rejected the exemption under the EU Parent-Subsidiary Directive on the grounds that the incorporation of LuxCo did not follow business reasons but rather was tax driven. The Spanish tax authorities asserted that considering pension funds’ pressures to control costs and grow revenue, the only reason that could be behind the set-up of a European structure could be the saving of taxes. This interpretation was later upheld by the tax courts.

The Spanish company contended that it carried on a coordinated management of its participation in European companies and that Luxembourg had been elected due to its excellent geographical location.

The Spanish implementation of the EU Parent Subsidiary Directive

The EU Parent-Subsidiary Directive (90/435/EEC) provides for a 0% withholding tax on dividends paid between entities resident in EU Member States under certain conditions.

The EU Parent-Subsidiary Directive, as implemented by Spain, does not expressly include the requirement that the recipient of the dividend be the beneficial owner. It does include an anti-avoidance provision that excludes the withholding tax exemption on distributions made to direct EU shareholders when the majority of the voting rights of the EU parent company are directly or indirectly owned by individuals or legal persons that are not EU residents.

However, in such case, under the wording of the Spanish tax rules in force until 2015, the DWHT exemption would still apply if one of the following conditions (the so-called “safe-harbors”) is satisfied:

  • The EU parent entity carries on a business activity directly related to the business activity of the Spanish subsidiary.
  • The business purpose of the parent entity is the management of the subsidiary with the necessary organization of human and material resources.
  • The parent entity may prove that it has been set up with a sound business purpose and not to unfairly benefit from the dividend withholding tax exemption.

Historically, these provisions have been strictly interpreted by the Spanish tax authorities and tax courts.

The Decision

The Spanish National High Court acknowledged the positions put forward by the parties. It considered that the matter had to be determined based on the interpretation of the Spanish implementation of the EU Parent-Subsidiary Directive. In particular, it referred to the three ECJ decisions on this DWHT exemption: Eqiom,1 Deister Holding & Juhler Holding2 and T-Danmark3 (“Danish case” on dividends).

The Spanish National High Court included a large excerpt of these ECJ decisions. It concluded that it may be inferred from these decisions that the existence of an anti-abuse rule may not result in a shift of the burden of the proof on the taxpayer, but rather this burden is on the Spanish tax authorities, which have the task of establishing the existence of such an abusive practice.

In the view of the Spanish National Court, the Spanish tax authorities’ presumption that the incorporation of LuxCo was purely tax driven for the sheer fact that the parent of LuxCo is a Canadian pension fund infringes on the holdings of the referred ECJ case law.

Rather, the Spanish tax authorities have the task of establishing the existence of elements constituting such an abusive practice, taking into account all of the relevant facts and circumstances with the powers it is vested, including tax information exchange agreement mechanisms available with Luxembourg and Canada. The Spanish National High Court also valued the fact that the Spanish company provided a certificate of beneficial ownership of LuxCo, issued by the Luxembourg tax authorities.


The Spanish National High Court followed the principles set forth in the ECJ cases on this topic and in particular on the burden of the proof to evidence the existence of abuse or lack thereof, amending the latest tax authorities’4 doctrine that could entail a breach of EU Law.

Nonetheless, the Decision does not address the analysis of the factors to distinguish genuine bona fide structures from wholly artificial arrangements. This remains a pressing issue in the context of tax audits and it is essential that investments in Spain be reviewed to ensure that they can adequately evidence all business and commercial reasons of their structures.


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

Ernst & Young Abogados, Madrid

Ernst & Young LLP (United States), Spanish Tax Desk, New York



  1. ECJ decision dated 7 September 2017, C-6/16.
  2. ECJ decision dated 20 December 2017, C-504/16 y C-613/16.
  3. ECJ decision dated 26 February 2019, C-116/16 and C-117/16.
  4. Spanish Economic Administrative-Court decisions dated 8 October 2019.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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