Prepared by Claudio Valz, Guglielmo Ginevra, Dimitri Cadorin
With the judgement in case C-601/23 of 19th December 2024, the Court of Justice of the European Union (CJEU) declared the incompatibility with the free movement of capital, pursuant to art. 63 of the Treaty on the Functioning of the European Union (hereinafter, “TFEU”), of the Spanish legislation that provides for the subjection to withholding tax of dividends paid to non-resident foreign companies that are in a situation of tax loss.
The judgement is of relevance for all EU and non-EU companies subject to withholding taxes on dividends (but the same principle is applicable, mutatis mutandis , also for interests and royalties) that find themselves in a situation of tax loss in their country of residence and confirms the conclusions already expressed by the EU judges in case C-575/17 of 22nd November 2018 in Sofina with which the similar previous French legislation was sanctioned and in cases C-115, 118, 119, 299/16 (the so-called “Danish Cases”) on withholding taxes on interests.
The facts of the case
The case in question concerns a company resident in the United Kingdom which received dividends in 2017 from a company resident in Spain and subject there to taxation by withholding tax at a reduced rate of 10% on the basis of the Double tax treaty United Kingdom-Spain .
In the fiscal year in which the British company received the Spanish dividends, it had recorded a tax loss and, for this reason, unable to deduct the amount withheld as a withholding tax from the taxes due in the United Kingdom, it requested the Spanish tax authorities to reimburse the withholding tax suffered, considering it to be in conflict with the principle of free movement of capital pursuant to art. 63 of the TFEU as it was discriminatory.
In fact, while the same type of withholding tax suffered in Spain with respect to a company resident there is considered a mere advance payment to be applied to the national corporate income tax, or refundable in the event that the company is in a situation of tax loss, for non-resident companies the withholding tax is conceived as a definitive tax, without a reimbursement mechanism in the event of losses suffered by that company.
Following the refusals first by the Spanish tax authority and then by the competent Spanish court, the company then appealed to the competent Spanish Higher Court of Justice, which decided to suspend the proceedings and submit the matter to the CJEU.
The ruling of the ECJ
With this judgment, the EU judges have established that the difference in treatment found in the Spanish legislation under examination to the detriment of non-resident companies that are subject to withholding taxes on dividends despite being in a situation of tax loss constitutes an illegitimate restriction on the free movement of capital prohibited by Article 63 of the TFEU.
Specifically, the CJEU – rejecting the potential justifications advanced under art. 65 TFEU by the Spanish State – has established that the tax regime applicable to the taxation of dividends in Spain between resident and non-resident companies, to the extent that – in an identical situation of tax loss – it implies an effective levy only in the hands of non-resident companies, determines in favour of resident companies a so-called treasury (or financial) advantage, if not a definitive exemption in the event of cessation of activities before a positive result is achieved again.
This disparity in the tax treatment of dividends based exclusively on the place of residence of the companies is such as to dissuade non-resident companies from making investments in companies established in Spain and therefore constitutes a restriction on the free movement of capital, prohibited by Article 63 (1) TFEU.
Actions to consider
Although the case at hand concerns exclusively withholding taxes on dividend flows, the underlying principle confirmed by the CJEU in this judgment is applicable to any withholding tax applied on financial and economic flows, such as interest or royalties. More specifically, the judgment in question is of interest for:
- Italian companies that are subject to withholding tax abroad even though they are in a situation of tax loss in Italy (subject to analogy between the foreign legislation and the legislation contested by the Court of Justice);
- non-resident companies that are subject to withholding tax in Italy even though they are in a tax loss situation in their Country of residence.
With particular reference to the second point, in fact, the Italian tax legislation on the matter is equally discriminatory to the extent that non-resident companies – unlike companies established in Italy – are subject to definitive taxation on such flows (outside the exemptions provided for by law) even if they are in a situation of tax loss in their Country of residence.
In light of the above, such entities should consider the opportunity to submit reimbursement requests for fiscal years not yet prescribed and, in cases where reimbursement requests have already been submitted, evaluate the opportunity to initiate litigation to request the judicial authority to recognize the same.
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