A recent binding ruling from the Spanish Tax office clarifies that where the ultimate shareholder under a double holding structure is non-EU resident, the Parent-Subsidiary Directive does not apply, so dividends paid are subject to withholding tax.

I. The issue

The key point was to determine whether a structure involving a sole non-EU resident shareholder (in this case, an individual tax resident in Switzerland / Singapore) who has an interest in an EU holding company (Luxembourg-resident) that holds a stake in a Spanish holding company might benefit under the Parent-Subsidiary Directive from a withholding tax exemption on dividend payments from Spain to Luxembourg.

II. Tax treatment of dividends paid among holding companies with a non-resident shareholder

Under the Spanish Non-Resident provisions implementing the Parent-Subsidiary Directive, dividends paid to qualifying parent companies in other EU Member States are exempt from withholding tax. However, certain anti-abuse provisions prevent the application of the exemption in the event that the ultimate shareholder to whom the dividend is paid is resident outside the EU, unless the EU company effectively engages in a business activity, has "substance" or was incorporated for valid economic (non- tax) reasons.

In this binding ruling, the Spanish tax authorities interpret the anti-abuse provisions to mean that dividend payments do not qualify under the exemption, so they are therefore subject to withholding tax, for the following reasons:

  • Both holding companies (Luxembourg and Spain) engage in the same business activity.
  • It is not necessary for the Spanish holding company to operate through a Luxembourg holding company to carry on its business, on the basis that the Spanish holding company was incorporated first, many years earlier.
  • Operation through holding companies will involve duplication of resources, task and functions.
  • Having the Luxembourg holding company presence on the management board of the Spanish holding company will not prevent the Spanish holding company from carrying out its management functions.
  • Operation through a holding company means a tax advantage, benefiting from the exemption regime.

III. What is next?

Businesses and advisers should look out for similar tax binding rulings based on identical criteria which might have an impact on double holding structures. For the time being, this ruling follows criteria already applied by the tax authorities on: (i) substance over form and (ii) avoiding duplication of activities in international structures which are incorporated only for tax purposes or to benefit from tax incentives.