Background of the case
In the case analyzed by the TEAC, the claimant company is resident in France and licensed the use of its own trademarks to an entity established in Spain. In accordance with applicable domestic regulations, the Spanish entity applied the corresponding withholdings on account of non-resident income tax (IRNR) for the royalties paid to the French company. These amounts were paid to the Spanish Treasury as final payments in the 2016 and 2017 tax years.
However, the beneficiary entity was unable to make the tax credits effective in French Corporate Income Tax, as the consolidated tax group to which it belongs had insufficient tax liability as a consequence of various tax losses. It should also be noted that French domestic legislation does not allow for the offsetting of such credits in subsequent tax years, which prevented the recovery of the withholding applied in Spain.
In view of this circumstance, the French entity requested—from the Spanish Treasury (Hacienda)—the refund of the withheld amounts. However, the Spanish tax administration dismissed the request, considering that, according to the provisions of the agreement between France and Spain, the obligation to avoid and eliminate international double taxation corresponds to the State of residence (i.e., France). As a result of this denial, the French company filed the corresponding appeal before the TEAC.
TEAC’s criteria
The resolution issued by the TEAC in this case represents a significant change from its previous criteria regarding IRNR. In this regard, the TEAC bases its resolution on the following points:
- It partially upholds the arguments of the French company by considering that a difference in treatment exists, as a non-resident entity—in a loss-making situation—is deprived of the possibility of recovering withholdings borne in Spanish territory, whereas a company resident in Spain in comparable circumstances would be able to obtain a refund of such withholdings in the event of tax losses.
- It recognizes that there is a clear violation of the principles of free movement of capital and non-discrimination, concluding that it is not in accordance with European Union Law for taxation at source to become final when the non-resident taxpayer lacks any real way to neutralize double taxation, as occurs in this specific case.
- Furthermore, it concludes that the Spanish Administration should have analyzed the fact that the claimant company could not deduct the generated tax credits and, therefore, recognizes the right of the French company to have the Spanish tax authority analyze the refund of the unrecovered withholdings.
Practical relevance of the resolution
This criterion has important practical implications for non-resident entities that receive income from Spanish sources and bear withholdings in this country. In particular, it opens the door to:
- A non-resident entity being able to recover amounts withheld in Spain that could not be deducted from the Corporate Income Tax of its country of residence due to the existence of tax losses in the company’s results.
- Greater alignment of the Spanish withholding system with EU principles and regulations.
Nuances of the resolution based on the specific case
As indicated, the TEAC partially upheld the allegations of the French company and introduced various nuances in its resolution:
- Firstly, it points out that the claimant entity belongs to a tax consolidation group in France, therefore it is necessary to analyze whether a tax group resident in Spain, in a comparable situation and with equivalent characteristics, would have had the right to a refund of the withholdings borne.
- Secondly, it considers that in this specific case there is insufficient data to carry out said comparative analysis, which is why it orders the Spanish tax administration to determine the criteria and conditions necessary to carry out the corresponding comparability exercise.
Conclusion
The TEAC’s resolution represents a significant step forward in the protection of non-resident taxpayers against situations of uncorrected double taxation. While a case-by-case analysis will be necessary, the criteria adopted by the TEAC reinforces the obligation to interpret Spanish domestic regulations in a manner consistent with European Union Law and, in particular, consolidates the principle of free movement of capital.
At PLANA VENTURA GARCÉS we are available to advise you and provide answers to any questions that may arise regarding this resolution.
