The Administrative Litigation Chamber of the Supreme Court (Tribunal Supremo, or TS), Section 2, in its judgement of 23 February 2021 (Judgement No. 253/2021) has ruled on withholdings made on dividends obtained by Norges Bank (Central Bank of Norway) for the investment that Norges Bank made in Spain through the Government’s Currency Reserve and Global Pension Fund (The Reserve Fund).

The TS dismissed the Appeal brought by the Spanish Government, confirming the provisions of the Audiencia Nacional in its judgement. The TS held that the dividend withholding imposed under Spanish law on distributions to non-Spanish sovereign wealth funds is contrary to EU law.

Norges Bank disputed that dividends paid by Spanish companies to a non-resident public entity managing a collective investment institution (Norges Bank), were subject to withholding tax under Spanish law, which goes against the free movement of capital recognized by EU law – and that those incomes would be exempt if received by a common Social Security Management and Services entity, according to the Corporation Tax Act.

The TS confirmed that, as Norway as a State is part of the European Economic Area, it cannot apply a less favourable tax regime than those applied to dividends distributed to companies resident in Spanish territory. Therefore, withholdings on dividends received in Spain discriminate against Norges Bank by mere residence in Spain, that the withholdings infringed on the EU principle of non-discrimination in the free movement of capital, and that the transactions made in purchase of shares on the Spanish market by Norges Bank fall within the principle of the free movement of capital. By withholding from the source, the dividends received by Norges Bank bear a higher tax burden in Norway than those borne by the Spanish State for dividends of the same nature.

According to the judgement, that difference in treatment would be justified in situations that are not objectively comparable or for overriding reasons in the public interest. Neither of these two reasons was given in the appeal. The Reserve Fund invests in the Spanish public debt market exercising no sovereign power – it seeks only to obtain returns by competing with other investors in a free-competitive financial market, carrying out an investment activity within the free movement of capital for clearly profitable purposes.

Sovereign wealth funds are financial investment vehicles and, like any other investment in the capital market, are affected and subject to the regulation established in the EU for any investor in capital markets. In this regard, free competition with the private sector’s own and usual investment instruments must be ensured. That is why differences in treatment cannot be established by the place of residence or place where capital investment occurred, which is the essential principle of free movement of capital.

The TS therefore concluded that national regulations that distinguish between foreign investors and domestic investors is not acceptable, and further stated that these considered differences were prohibited discrimination.

In the same vein, another TS Judgment, No 1812/2020 of 22 December 2020, found that withholdings on dividend income (from a non-resident pension fund based in Canada) infringed on the principle of free movement of capital, according to the consolidated doctrine of the Courts of Justice of the European Union. This judgement confirms that this consideration for investment funds, particularly UCITS (undertakings for Collective Investment in Transferable Securities), should also be extended to investment funds resident in third states (where ‘third states’ refer to those countries that are not members of the EU or the European Economic Area). The TS declared the Canadian fund has the right to a refund of withholdings on dividends received from entities residing in Spain.

We will be watching for any government reaction or change to regulatory provisions, but this could provide opportunities for refunds of unduly applied withholding tax on foreign sovereign wealth funds under Spanish tax law.

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Marta Reguera

Marta Reguera
Director Tax Support

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