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June 30, 2023

Spanish Supreme Court affirms judgment holding domestic withholding tax exemption applies to EU shareholder dividends

  • In its judgment (the Judgment) of 8 June 2023, the Spanish Supreme Court has ruled on the application of the dividend withholding tax exemption under the European Union Parent Subsidiary Directive and the special anti-abuse rule.
  • The Court confirms a favorable decision by the National High Court that overturned the decisions of the Spanish tax authorities that implied a general presumption of abuse. This general presumption resulted in the taxpayer's bearing the burden to prove that no abuse exists.
  • The Court concludes that Spanish tax authorities should determine the existence of objective and subjective elements constituting alleged abusive practices.

Executive summary

On 8 June 2023, the Spanish Supreme Court issued a Judgment on the application of the DWHT exemption under the European Union Parent Subsidiary Directive (EU PSD)1 and the special anti-abuse rule. The judgment confirms a favorable decision by the National High Court overturning the criteria of the Spanish tax authorities, which had rejected the dividend withholding tax (DWHT) exemption on the basis that the dividend recipient is not incorporated for valid business reasons.

Spanish implementation of the EU PSD at the time when the dividend payment was made included a special anti-abuse rule with certain safe harbors, one of them being that the EU parent entity had to prove that it had been set up with a sound business purpose and not to unfairly benefit from the DWHT exemption. Following a European Court of Justice (ECJ) ruling on the burden of proof, the Spanish National Court overturned the decisions of the Spanish tax authorities, rejecting the existence of a general presumption of abuse and stating that the Spanish tax authorities should determine the existence of objective and subjective elements constituting an allegedly abusive practice.

In this judgment, the Spanish Supreme Court confirms the decision of the Spanish National High Court issued on 25 May 2021 (See EY Global Tax Alert, Spanish National High Court overturns denial of withholding tax exemption on dividend payments to EU shareholder, dated 2 July 2021).

Detailed discussion


The Spanish tax authorities rejected the DWHT exemption applied by a Spanish company (withholding agent) to 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 DWHT exemption under the EU PSD on the grounds that the incorporation of LuxCo did not occur for valid business reasons, but rather was tax driven. In particular, the Spanish tax authorities considered that, although the Canadian pension fund pursued structure costs optimization and revenue increase, the European holding structure's only purpose was to save taxes. This interpretation was first upheld by the tax courts.

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

The Spanish implementation of the EU Parent Subsidiary Directive

The EU PSD provides for a 0% withholding tax on dividends paid between entities resident in EU Member States under certain conditions.

The EU PSD, as implemented by Spain, includes an anti-avoidance provision that excludes the DWHT 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. The Spanish implementation of the EU PSD does not expressly include the requirement that the recipient of the dividend be the beneficial owner.

However, in such case, under the wording of the Spanish tax rules in force until 2015, applicable in the years in which the dividends were paid in the case at hand, the DWHT exemption would still be available if one of the following conditions (the so-called "safe-harbors") is satisfied:

  1. The EU parent entity carries on a business activity directly related to the business activity of the Spanish subsidiary.
  2. The business purpose of the parent entity is the management of the subsidiary with the necessary organization of human and material resources.
  3. 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 wording from 1 January 2015 of the Spanish rules limits the safe harbor provision to cases where the incorporation and operation of the EU entity is grounded on sound economic purposes and significant business reasons.

Historically, the anti-abuse provision with the relevant safe harbors has been strictly interpreted by the Spanish tax authorities and tax courts.

Spanish Supreme Court Judgment

After defining the position of the tax authorities, the Spanish Supreme Court, in line with the Spanish National High Court, considered that the matter had to be determined based on the interpretation of the Spanish implementation of the EU Parent-Subsidiary Directive. Most notably, the Spanish Supreme Court refers to the ECJ judgment on the Danish case regarding DWHT exemption2and mentions other ECJ case law (cases Eqiom3 and Deister Holding & Juhler Holding4).

In addition, the Supreme Court considers that it is not necessary to request a preliminary ruling on the basis of the "acte éclairé" doctrine, 5 which supplements the "acte clair" doctrine: the Supreme Court considers that the question has already been answered by the ECJ and that there is therefore no need to refer it to the ECJ.

The Spanish Supreme Court judgment includes a large excerpt of these ECJ decisions, supporting the conclusion 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 to the taxpayer. Rather, this burden is on the Spanish tax authorities, which must prove the existence of such an abusive practice.

In effect, the Spanish tax authorities have the task of proving the existence of elements constituting such an abusive practice, taking into account all of the relevant facts and circumstances with the powers vested in it, including tax information exchange mechanisms available under the Directive on Administrative Cooperation (DAC)6 and the tax treaties.


This judgment follows the principles of the ECJ cases on the burden of proof to evidence the existence of abuse or lack thereof.

The use of EU holding companies remains a priority issue of tax audits, where the tax authorities may seek to challenge whether these are genuine bona fide structures to invest into Spain. It is therefore key that multinational groups review their investment structures to assess any potential risks considering that EU holding structures will continue under the scrutiny of the Spanish Tax Authorities.

International EU holding structures shall be reviewed, and groups should adopt a consistent "audit-ready" approach to ensure that they can adequately evidence all business and commercial objectives of their structures. Preparation of contemporaneous support documentation and defense files are strongly recommended.


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

Ernst & Young Abogados, Madrid

Ernst & Young LLP, Spanish Tax Desk, New York

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor


1 Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.

2 ECJ judgment dated 26 February 2019, C-116/16 and C-117/16.

3 ECJ judgment dated 20 December 2017, C-504/16 y C-613/16.

4 ECJ judgment dated 7 September 2017, C-6/16.

5 Judgment of the Court of 27 March 1963. - Da Costa en Schaake NV, Jacob Meijer NV, Hoechst-Holland NV v Netherlands Inland Revenue Administration, among others.

6 Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation.


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