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Freshfields Transactions

| 2 minutes read

Parent-subsidiary exemption: Spanish court recognises its application to a Luxembourg holding company

The Spanish National High Court (‘the High Court’) has issued a judgment (‘the judgment’) on the entitlement of a non-resident taxpayer to the parent-subsidiary exemption following a tax audit of the recipient of the dividends .

The parent-subsidiary exemption is set out in article 14.1.(h) of Royal Legislative Decree 5/2004, which implements Council Directive 2011/96/EU (‘the Parent Subsidiary Directive’). The judgment was the first on the exemption since the European Court of Justice (ECJ) judgments issued in the Equiom case (C-6/16), the Deister Holding case (C­504/16 and C-613/16) and the Danish Cases (C-116/16 and C-117/16) (‘the ECJ dividend cases’).

A team from Freshfields’ Madrid office led by partner Silvia Paternain and senior associate Álvaro Fernández advised throughout the entire administrative and judicial procedure.

The judgment was issued against the background of the Spanish tax administration (STA) and the administrative courts interpreting certain paragraphs of the Danish Cases in isolation, without considering the ECJ’s main conclusions. This resulted in a significant increase in tax audits of holding companies tax resident in the EU controlled by non-EU investors, which generated widespread concern among tax practitioners.


The taxpayer – a Luxembourg holding company engaged in the purchase, sale and management of shareholdings (‘the company’) – carries out material investments in different jurisdictions (including Spain). The company does not have employees and its sole shareholder is a non-EU entity. The company received dividends from a Spanish company that were subject to withholding tax. The company requested the refund of the tax due (15 per cent).

However, following an audit of the Luxembourg company, Spain’s tax authorities rejected the company’s right to apply the parent-subsidiary exemption because:

  • 100 per cent of the Luxembourg company’s share capital is held directly by a non-EU company; and
  • the company failed to prove it was incorporated for valid economic reasons.

The judgment

The High Court followed the ECJ dividend cases, confirming that the STA, and not the taxpayer, should bear the burden of proof when determining whether the main purpose of the entity receiving the dividends is to benefit from the parent-subsidiary exemption, thus indicating an abuse/fraudulent use of the legal provision.

In addition, the court confirmed that EU holding companies can benefit from the parent-subsidiary exemption if they can show that, according to a set of objective and subjective elements, there is no abusive or fraudulent use of the provisions.

The High Court affirmed that, in this particular case, the Spanish tax authorities had failed to prove that the company was not incorporated for valid economic reasons (hence the parent-subsidiary exemption should be recognised with no further consideration). It also accepted the valid business reasons underpinning the company.

In reaching this conclusion, the court decided that:

  • the company had been investing in companies in different jurisdictions since its incorporation;
  • the company was incorporated and made relevant investments prior to its acquisition of a share in the entity distributing the dividends in question;
  • dividends distributed by the Spanish entity were managed by the company with a view to optimising the use of cash and reinvesting, with such investments being approved and executed by the board of directors; and
  • dividends distributed by the Spanish entity were, although significant, only a portion of the total income obtained by the holding entity from its multiple investments.

Finally, the High Court concluded that the fact that the company is controlled by a non-EU company is not enough to regard the company as an instrumental vehicle. This is because such an interpretation would deny any subsidiary wholly owned by its parent company the entitlement to benefit from the Spanish parent-subsidiary exemption. In this regard, the High Court asserted that a subsidiary can act on an autonomous basis even if the decision-making sits with its parent company, as this is an inherent characteristic of corporate groups.


europe, tax