In 2009 and 2010 Global Nory, S.L. distributed a dividend of 7,000,000 euros to its parent company resident in Luxembourg, without declaring withholding taxes, as it considered that the dividend was exempt. In 2013, Global Nory, S.L. was notified of the commencement of general inspection proceedings, referring, among other items, to the dividend payments, and in 2014 the final assessment was issued, resulting in additional withholding taxes of 700,000 euros and 138,753.43 euros to late payment interest. The assessment was based on the following facts: The only relevant asset of Global Noray SL is a 5% stake in the listed company Corporación Logística de Hidrocarburos. This shareholding was acquired for a sum of 176,500,000 euros. Global Noray, S.L.’s income consists mainly of dividends received on these shares. Global Noray, S.L., is wholly owned by PSP Eur SARL, which in turn is wholly owned by PSP Lux SARL. The latter company is wholly owned by PSP IB. PSP stands for “Public Sector Investment Pension”. PSP IB stands for “Public Sector Pension Investment Board”, which is a Canadian Crown Corporation whose purpose is to manage the public pension funds of various groups of civil servants, military and police officers in Canada. PSP Eur SARL has provided a certificate of residence in Luxembourg. The tax authorities considered that the withholding tax exemption was not applicable, since those entities lacked any real economic activity, and considering that there were no economic reasons, but rather fiscal reasons, in the incorporation of the various European companies dependent on the Canadian parent company, since the ultimate owner of the group is a Canadian fund, eliminated the exemption in the settlement agreement. In the Inspectorate’s view, PSP Eur SARL has as its object the direction and management of the filial company without the appropriate organisation of material and personal resources, nor has it proved that it was set up for valid economic reasons, and not in order to take undue advantage of the scheme provided for in point (h). Since the filial company has no economic activity of any kind, merely collecting a dividend from CLH, there is no adequate organisation of human and material resources to manage an investee which does not carry out an economic activity. Appeals were filed by Global Noray but they were all subsequently dismissed by courts. Finally, an appeal was filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court also upheld the assessment of additional withholding taxes and dismissed the appeal of Global Noray. The Court concluded that the Spanish anti-abuse clause which applies to dividend distributions by a Spanish subsidiary to its European parent company controlled, directly or indirectly, by shareholders not resident in the EU or in the EEA must be construed in such a way that the burden of proof of abuse falls on the tax authorities. However, in the case at hand the tax authorities had lifted this burden of proof. Click here for English Translation Click here for other translation ...

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. The assessment was set aside by the National Court in a decision issued in November 2018. The Supreme court were to clarify the conformity with the law of the judgement of the Audiencia Nacional, following in the wake of the order of admission which, in a similar manner to that proposed in appeal no. 5448/2018, ruled in favour of the taxpayer on 3 February last, asks the following questions. a) to clarify the objective and temporal limits of the so-called dynamic interpretation of the DTAs signed by the Kingdom of Spain on the basis of the OECD Model Convention – as in this case the Spanish-Swiss DTA – when, despite the fact that the concept of beneficial owner is not provided for in article 12 of the DTA, this figure is applied in accordance with the Commentaries to the OECD Model Convention (drawn up at a date subsequent to the initial formalisation of the Convention), despite the fact that the beneficial owner was not introduced in Article 12 (relating to royalties) in subsequent amendments to the DTA, but was introduced in other provisions (Articles 10 and 11) for other concepts such as dividends or interest. b) Whether dynamic interpretation, if possible, allows the applicator of the rule, including the Court in proceedings, to correct the actual meaning or literal tenor of the rules agreed in the Convention, which occupies a preferential place in our system of sources (Article 96 EC), in order to avoid treaty overriding or unilateral modification. c) Clarify whether the Commentaries to the OECD Model Convention (here drawn up at a date subsequent to the signing of the Convention) constitute a source of law in their own right (Articles 117 EC and 1. 6 of the Civil Code), as they are not, as we have stated – STS of 19 October 2016, pronounced in appeal no. 2558/2015-, as they are not strictly speaking legal rules that are binding on the Courts of Justice and which, therefore, can be the basis for a ground for cassation in their hypothetical infringement and whether, consequently, the Courts can rely on their indications or opinions to stop applying a double taxation Convention and directly apply the national law, which results in a qualitatively higher taxation. These questions coincide substantially, with slight variations in formulation, with those examined in appeal no. 5448/2018, which gave rise to the favourable judgment -for the taxpayer- of 3 February 2020. This leads us to specify the neuralgic points of the problem raised here, as far as they coincide, for the decision of the appeal in cassation and the formation of jurisprudential doctrine in this matter: a) what is the dynamic interpretation of the Conventions and whether it is an expression that can find equivalents in our legal tradition; b) whether the OECD model agreements or their commentaries, by their origin and nature, are legal rules that the courts of justice must take into account when interpreting the rules agreed in the Conventions, in accordance with the provisions of Articles 94 and 96 of our EC; c) whether such commentaries, guidelines or interpretative models can take precedence over the hermeneutical rules, either those agreed between the signatory states or in other conventions and treaties, or those of their respective domestic legal systems, and by virtue of what source of legitimacy; d) whether this dynamic interpretation can be used to interpret an article of the Convention on the basis of the content of other subsequent rules of the same Convention, in any event not in force at the time of application of the withholdings required here; and e) whether Spain can unilaterally interpret, on the basis of this rule, the concept of royalties, as well as that of beneficial owner, in order to deny that it is present in the paying company. Judgement of the Supreme Court The court held in favour of Colgate and set aside the decision of the tax authorities. Excerpts “The provisions of paragraph 1 shall not apply if the beneficial owner of the interest, who is a resident of a Contracting State, carries on a business in the other Contracting State from which the interest arises through a fixed establishment situated in that other State and the debt-claim giving rise to the interest is effectively connected with that fixed establishment. In such a case the provisions of Article 7 shall apply”. As already indicated, it should be stressed that the wording of Article 12 (royalties) did not include any reference to the concept of beneficial owner (despite having had the opportunity at the time of the amendment of the Convention). Moreover, to date, the concept of “beneficial owner” has not been introduced in Article 12 either, despite the fact that there has been a second amendment of the Spain-Switzerland DTA through the Protocol made in Madrid on 27 July 2011 (BOE of 11 June 2013) – “Protocol of 2011”. That is to say, without prejudice to the incorporation of the concept of “beneficial owner” in the 1977 and 1995 Model Conventions and the subsequent amendments made to the conventional text that came to reflect this and other modifications introduced in the Model Convention, the fact is that the literal wording of the sections that interest us here in Article 12 of the Spain-Switzerland DTA maintains, to date, its original wording. That is to say, the States have agreed to modify and adapt the CDI to the new standards set out in the Model, but only in those provisions expressly agreed by both States and among which the provision relating to royalties was not included […]”. “By their very nature, the above considerations lead us to the need to annul and set aside the lower court judgment, on the ...

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A. (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. Judgement of the National Court The court held in favour of Colgate and set aside the decision of the tax authorities. SP vs Palmolive SAN_1128_2018 ENG NW”>Click here for English Translation Click here for other translation ...

In the INC bank case the tax administration had characterised part of the interest-bearing debt of a local branch of a Dutch bank, ING DIRECT B.V,  as “free” capital, in “accordance” with EU minimum capitalisation requirements and consequently reduced the deductible interest expenses in the taxabel income of the local branch for FY 2002 and 2003. The adjustment had been based on interpretation of the Commentaries to the OECD Model Convention, article 7, which had first been approved in 2008. Judgement of the National Court The court did not agree with the “dynamic interpretation” of Article 7 applied by the tax administration in relation to “free” capital, and ruled in favor of the branch of ING Direct. “In short, in accordance with the terms of the aforementioned DGT Consultation of 1272-98 of 13 July, “Consequently, to the extent that the branch or establishment is that of a banking institution, the interest paid to the head office will be deductible”, the appeal must be upheld in its entirety. Click here for English translation Click here for other translation ...