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Spanish CGT rules as discriminatory by Supreme Court

20 January 2014   (0 Comments)
Posted by: Author: Ulrika Lomas
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Author:   Ulrika Lomas (

In a recent decision (appeal No 1374/2011), Spain's Supreme Court has ruled that the capital gains tax on non-residents may be discriminatory in some cases. In Spain, discrimination could arise when residents are allowed to claim relief from economic double taxation while non-residents are not.

The case involved a French company that sold its shares in a Spanish subsidiary in 2002. It made a capital gain of EUR15.3m on the sale, which attracted a CGT rate of 35 percent. The actual stake is unknown, but the French company had a substantial ownership, i.e. in excess of 25 percent. Accordingly, the capital gains were taxable under Spanish law, and article 13-2 of the Spain/France tax treaty provided for concurrent taxation by both countries.

Under Spanish domestic law, resident companies may claim relief from CGT arising from sales of shares, provided a minimum 5 percent ownership criterion is met. Technically speaking, CGT is calculated at the standard corporation tax rate (35 percent at the time), but a tax credit may be claimed on the part that is in fact derived from undistributed profits.

CGT relief is designed to avoid economic double taxation, so that the after-tax profits of a Spanish company may flow through another Spanish company without further taxation. A similar tax credit would have applied for dividends, providing the shareholder held a minimum 5 percent stake. Here, the Spanish subsidiary had undistributed profits of EUR3.6m. Accordingly, the taxpayer was denied a EUR1.25m tax credit, which is quite substantial. As there is no CGT relief for non-residents, the key issue in this case was to determine whether there was an illegal discrimination.

According to the Supreme Court, resident and non-resident companies were held to be in a comparable situation albeit with a different tax treatment. Therefore, the Court found an illegal discrimination against non-resident taxpayers if tax relief was denied. The Court's reasoning was primarily based on existing ECJ case law, namely the cases Denkavit Internationaal BV (C-170/05) and Commission v. Spain (C-562/07). As it solely relied on EU law, the Court refrained from looking at whether there was a prohibited discrimination under treaty law. 

Most importantly, the Supreme Court held that the discriminatory CGT was against the EU principle of freedom of capital, even though the taxpayer held a substantial participation in the Spanish subsidiary. This shows an unexpected departure from the Denkavit principles, which applied the EU freedom of establishment as the legal basis.

This different legal basis is notable here, as the principle of freedom of capital is extendable to non-EU countries, whereas the principle of freedom of establishment is limited to intra-EU movements. Therefore, this case should raise important questions for non-EU investors in Spain.

It should also be noted that the Supreme Court failed to check whether the French parent was able to claim a foreign tax credit in France. This again shows some departure from the ECJ's findings in the Denkavit case.

This article first appeared on 


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