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January 6, 2022

Spanish Tax Authorities deny withholding tax exemption on interest payments to EU residents based on GAAR

Executive summary

In the context of a tax audit procedure initiated following a spontaneous exchange of information by the Dutch tax authorities, the Spanish tax authorities (STA) challenged the domestic withholding tax exemption on interest paid to European Union (EU) residents based on the application of the General Anti-Abuse Rule (GAAR), on the grounds that the recipient of the interest was a conduit entity and not the beneficial owner of the income.

The approach of the STA and administrative courts to date has consisted of disallowing the exemption on the basis of the beneficial ownership clause as a separate requirement or an independent anti-abuse rule, even if not expressly included in the wording of the Spanish tax law, an approach further strengthened following the STA's interpretation of the European Court of Justice "Danish Cases." The use of GAAR to challenge the exemption in this current case may indicate a change of approach by the STA.

In order to substantiate the procedure based on GAAR, the STA are required to follow a more onerous specific procedure which requires consultation with an Advisory Committee whose conclusions are binding for the tax audit body. This Alert examines the report issued by such Advisory Committee published on 16 December 2021 (the Report).

Going forward (i.e., for interest withholding tax accrued from the date of publication of the Report), cases that are substantially equal to the one in the Report and successfully challenged by the STA based on GAAR could potentially entail penalties (50% of that tax due).

Detailed discussion


The Spanish Nonresidents' Income Tax Law provides an exemption for interest payments to EU lenders. This exemption was introduced before the EU Directive on Interest and Royalty Payments1 was approved and provides for a wider scope of application. Among other deviations from the Directive, the Spanish domestic exemption does not require that the recipient of the interest income is the beneficial owner, and it also does not include a specific anti-abuse clause.

It has been accepted by Spanish courts in the past that this exemption could only be challenged under the Spanish GAAR and not merely by arguing that the recipient of the interest is not the beneficial owner.2 The Spanish National Court has stated that "the notion of beneficial ownership as an anti-abuse restriction may not be presumed, but rather needs to be expressly stated in the law."

However, the STA and administrative courts have taken the position that this domestic exemption must be interpreted in accordance with the Directive. Under the STA and tax courts' interpretation of the relevant European Court of Justice case law, the exemption could be challenged on the basis of the beneficial ownership clause as a separate requirement or an independent anti-abuse rule, even if not included in the wording of the Spanish tax law (See EY Global Tax Alert, Spanish Central Tax Court applies doctrine of ECJ Danish cases to deny withholding tax exemption on dividend payments to EU shareholders, dated 26 June 2020).

Moreover, further judicial courts decisions3 have insisted on the idea that the beneficial owner clause is not "embedded" but must be expressly required by the applicable provision, although in such decisions, the courts reference the dividends and royalties' provisions in tax treaties and not the Spanish domestic interest withholding tax exemption.

Case under analysis and approach followed by the STA

The instant case refers to a tax audit procedure related to withholding taxes on interest payments made by a Spanish entity to a lender company tax resident in the Netherlands. Both companies were controlled by the same parent company tax resident in the United States (US). The Spanish company did not withhold Spanish taxes on interest payments to the Dutch entity taking the position that the domestic exemption on interest payments to EU residents was applicable.

The tax audit was initiated as a result of a spontaneous exchange of tax information carried out by the Dutch tax authorities. The Dutch legislation applicable to financial services companies requires that these entities meet certain minimum substance requirements. If these requirements are not met, the Dutch authorities may spontaneously exchange information with the other jurisdictions involved. In this case, the trigger was that the Dutch company's bookkeeping was kept in the US.

The Spanish tax auditor considered that the Dutch entity qualified as a conduit entity, arguing that it had no real presence in the Netherlands, and acted merely as a "mediator" between the Spanish company and the real and beneficial owner of the Spanish source income, i.e., the US common parent entity.

Upon realizing that the GAAR could be applicable, the STA initiated the specific procedure established in the law. The application of this anti-abuse rule requires a mandatory and favorable report, which is binding for the tax audit bodies, from an Advisory Committee composed by members of the Tax Agency and the General Directorate of Taxes.

The decision of the GAAR Advisory Committee

The Committee's conclusion is based on the following facts:

  • The Dutch entity lacked any economic substance. In particular, the entity did not have any employees or the material means necessary to carry out its main activity, i.e., financial activity.
  • The Dutch entity was domiciled, for legal and tax purposes, at the premises of a Dutch "trust office," where more than 4,000 companies not belonging to the same group were domiciled.
  • A large part of the members of the board of directors of the Dutch entity were employees of the trust office, who also performed managerial functions in other holding companies not belonging to the same group domiciled at the same address.
  • The Dutch entity did not hold any other financial assets or shares.
  • The financing granted to the Spanish company was structured as a "back-to-back" loan. From the analysis of the profit and loss account of the Dutch entity, it was noted that it exclusively registered financial income and all the financial expenses derived from transactions with the US parent company.
  • The Dutch entity obtained a spread on the financing which was taxed in Netherlands. However, all income received was subsequently distributed to its shareholder, which implies that the US common shareholder partner was the beneficiary of the total amount of interest received in two different ways (loan and dividends).

Based on the above facts, the Advisory Committee concluded that:

  • The structure and financial agreements were an artificial arrangement with a purely tax purpose, lacking any economic substance due to the non-existence of any economic reasons that support the transactions, beyond obtaining tax savings. It is therefore considered that the requirements to apply the GAAR concur. To support this reasoning the Committee referenced the, the so-called "Danish cases."
  • The Dutch entity is a conduit entity interposed between the payer and the beneficial owner of the income. In this regard, what is relevant according to the STA is who is the owner of the income from an economic point of view, that is, the entity that effectively disposes of and benefits from such income.
  • The Committee held that the status of beneficial owner constitutes a material requirement for the application of the domestic withholding tax exemption on interest payments even when it is not specifically included in the wording of the Law.
  • The domestic exemption for interest payments to EU tax residents is not applicable in the case at hand. Nevertheless, the Committee considered that the reduced 10% rate established in the Tax Treaty between Spain and the US in force in the tax periods under tax audit should be applied, since the US parent was the effective beneficial owner of the interest income.


The Report issued by the GAAR Advisory Committee may have the following relevant implications:

  • The STA have opened a new route to challenge the application of the domestic withholding exemption on interest payments which, although more cumbersome from a procedural perspective, may strengthen their position by overcoming some flaws in their prior approaches.
  • The Report adheres to the criteria previously followed by the STA in the interpretation of the "Danish cases" and the requirement that the recipient of the interest qualifies as the "beneficial owner" for the application of the domestic exemption. Additionally, the STA are also applying such approach to the analysis of the concurrence of the elements of abuse for the purposes of the application of the domestic GAAR. This intricate approach adds complexity to the technical analysis and could result in an increase in uncertainty for international groups.
  • The application of GAAR may have relevant implications on the applicability of penalties. Any arrangement or structure that is deemed as substantially equal to those which the STA has publicly designated as abusive could be subject to penalties (50% of that tax due), if the Spanish taxes are accrued and payment to the Spanish Treasury is due after the publication of the Report (i.e., interest accrued in December 2021, for which the Spanish taxes are due in January 2022, and onwards). Also, access to Mutual Agreement Procedures provided in tax treaties may be denied in certain cases if GAAR is applied.

Multinational groups with financing structures involving EU intermediary companies should review their position to assess any potential risks and adopt a consistent "audit ready" approach through the preparation of a "defense file."

The analysis of this development should be considered together with the European Commission proposal for a Directive for preventing the misuse of shell entities (See EY Global Tax Alert, Proposal for preventing the misuse of shell entities (UNSHELL), dated 23 December 2021).


For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid

Ernst & Young LLP (United States), Spanish Tax Desk, New York



1 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.

2 Spanish National High Court, decision number 4707/2017 dated 31 October 2017.

3 Spanish Supreme Court decision case number 1996/2019 dated 23 September 2020 (See EY Global Tax Alert, Spanish Supreme Court confirms case law on limits to dynamic interpretation of tax treaties, dated 21 October 2020) and Spanish National High Court decision dated 18 June 2021, SAN 2804/2021.