Spain and Limitation of Benefits

I’m grateful to Gomez-Acebo & Pombo for their analysis of the recent case on Limitation of Benefit for  0%. withholding under the EU Parent-Subsidiary Directive (AN November 8 2012).

The case concerned dividends paid by a Spanish Co to a UK holdco which was ultimately controlled in Dubai. The decision at the Audienca Nacional (AN) was that the company did not benefit from the 0% witholding as UK Co did not have sufficient substance.

“The main purpose of the anti abuse provision in the EU Parent-Subsidiary Directive,as implemented in Spain , is to avoid the incorrect application of the 0% dividend withholding tax through the interposition of EU conduit companies, in cases where the ultimate parent is non EU resident”.

The decision is an interesting one and provides a “flexible and reasonable” interpretation of the Spanish anti-abuse provision. But I think what may be more interesting is the wider development and application of this issue by European fiscs (based on some discussions I have had). This case is a clear attempt to stop treaty shopping where ultimate ownership is outside the EU. What if European fiscs were to look at treaty shopping where the beneficial owner of the income stream was outside the EU? To take a topical question, should a royalty paid within Europe which is ultimately paid to say Bermuda be exempt from withholding tax when it is paid between two European countries (one of which is the conduit company)? To paraphrase the judgement above, does the interposition of an EU conduit company where the ultimate beneficial owner of the income is in a tax haven lead to the incorrect application of the 0% withholding tax to royalties?

This is a very interesting case, it may have some interesting ramifications.

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