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European Union-Spain

13 August 2006

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European Commission requested Spain to end infringement to the EC Parent-Subsidiary Directive concerning the use of anti-abuse measures

On 5 July 2006, the European Commission announced that it had sent a formal request to Spain to amend an anti-abuse rule dealing with cases in which a Spanish company pays a dividend to a company established in another EU Member State that is itself owned by a company resident in a third country, i.e. outside the European Union.

The disputed Spanish anti-abuse provision (Art. 14.1.h of the Non-Residents Income Tax Act) states that the tax exemption on dividends will not apply " ... when the majority of the voting rights of the parent company is, directly or indirectly, held by individuals or legal persons that do not reside in the European Union, except when the parent effectively performs a business activity directly related to the business activity of the subsidiary or has the corporate purpose of directing and managing the subsidiary through an adequate organization of human and material resources or it proves that it was set up for valid economic reasons and not to unduly benefit from the regime provided by this section".

Even though Art. 1(2) of the EC Parent-Subsidiary Directive gives the EU Member States a certain discretionary power to apply domestic or treaty-based anti-abuse provisions, in derogation from the substantive rules of the Directive, the Commission points out that such measures must be proportionate to the objective in question.

In this particular case, the Commission is of the opinion that the Spanish measure in question does not comply with this condition, as it applies automatically to all the cases in which a parent company resident in an EU Member State is owned by a company resident in a non-EU third country, without any case-by-case examination of whether or not an abuse is actually being committed.

The Commission, therefore, considers this rule to be contrary to the EC Parent-Subsidiary Directive and has requested Spain to amend accordingly the disputed rule. If no satisfactory reply to the reasoned opinion is received from Spain within 2 months, the Commission may refer the matter to the European Court of Justice (ECJ).

It should also be noted that, in a recent reported case the Spanish Tribunal Económico-Administrativo Central rejected a request to apply the withholding tax exemption on the dividends distribution by a Spanish subsidiary to its Netherlands parent company (wholly owned by a US parent company) on the grounds that none of the exceptions set out in the anti-abuse clause applied to the case.

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