Spain: Differential treatment runs contrary to free movement of capital for foreign, domestic non-UCITS funds

A Supreme Court decision concerning principle of free movement of capital for foreign, domestic non-UCITS funds

Differential treatment runs contrary to free movement of capital

The Supreme Court held, in five judgments issued between 5 and 11 April 2023, that the Spanish tax regulations run contrary to the principle of free movement of capital set forth in Article 63 of the Treaty on the Functioning of the European Union as they lead to unjustified differential treatment of certain non-resident non-undertakings for the collective investment in transferable securities (UCITS) funds with respect to Spanish-resident non-UCITS funds.

The Supreme Court confirmed that non-resident non-UCITS funds must meet the following requirements to be entitled to claim a refund of Spanish withholding tax:

  • They must raise capital contributions from the public in general, notwithstanding the possibility of limiting access to professional or qualified investors.
  • They must be authorized in their country of origin or residence by the competent supervisory authority.
  • They must evidence that they are managed by a duly authorized entity in their country of origin or residence, as an alternative investment fund manager, under the terms of Directive 2011/61/EU.

The court also held that, when the tax authorities have reasonable doubts as to a fund’s compliance with the requirements, they should make use of the information gathering powers available under the applicable double taxation treaty (DTT) and the automatic exchange of information mechanisms in the European Union.

Finally, the court held that the restriction on the free movement of capital can only by neutralized by means of a DTT in cases when the non-resident non-UCITS fund is entitled to deduct the Spanish withholding tax paid in excess of 1% (the tax rate applicable to resident non-UCITS funds) from the tax due in its state of residence. This is not usually the case for non-resident funds, as they are generally eligible for a beneficial tax rate of less than 19% and, as such, cannot apply the tax credit for withholding taxes incurred abroad. 

KPMG observation

Non-resident non-UCITS funds need to perform a proper individual analysis to confirm whether they are entitled to claim a refund from the Spanish tax authorities.

Read a May 2023 report [PDF 501 KB] prepared by the KPMG member firm in Spain


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