Domestic double taxation relief applicable to capital gains derived by EU resident entities on disposal of shares in Spanish entities


Following the non-discrimination principle, in response to an appeal dated 25 Octobe the Spanish Supreme Court has applied a tax credit to avoid double taxation, provided in the Corporate Income Tax Law for Spanish resident entities only, to capital gains derived by EU resident entities from the transfer of shares in Spanish entities.

In the case at hand, a French company sold the shares of its Spanish subsidiary, resulting in  taxation on the capital gains in Spain. However, the French appealer claimed that the Spanish rules governing taxation of capital gains derived by non-Spanish resident entities are discriminatory, provided that, had the transfer had been operated by a Spanish resident entity, the appealer would have been entitled to apply a tax credit on the undistributed retained earnings of the subsidiary generated during the holding period. However, such tax credit is not available for nonresident transferors and as a consequence, the appealer claimed for an undue income refund.

The Supreme Court considered the appeal and stated that, under EU regulations, the denial of the deduction for non-resident entities is contrary to the principle of free movement of capitals, as it is not based on an objective difference. Consequently, the most burdensome tax treatment is not justified and it should be recognized that the appealer has the right to apply the deduction on the capital gains obtained in the same conditions as a Spanish resident entity.

As a result, the Supreme Court ordered the undue income refund and the payment of delay interests by the Spanish Tax Authorities.

This judgment entitles a parent entity resident in an EU country to claim the application of this doctrine based on the EU non-discrimination principle.

Moreover, EU parent entities that have transferred shares in a Spanish subsidiary within the last four years and have paid the corresponding tax in Spain, should review whether they have paid higher tax in Spain than that of a Spanish resident entity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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