Recovery of Spanish dividend withholding taxes

Background

In early 2021, the Spanish Supreme Court issued two judgments in favour of Norges Bank, one of them as manager of the Norwegian Government Pension Fund (a sovereign wealth fund owned by the government of Norway) confirming its right to obtain a refund of withholding taxes suffered on Spanish source dividends together with the interest for late refunds. The judgments confirmed the earlier decision of the National High Court that, since equivalent Spanish entities (the Social Security Reserve Fund and the Bank of Spain) benefit from a tax exemption applicable to Spanish source dividends, it was a restriction contrary to the freedom of capital movement to subject equivalent non-resident investors to effective tax rates between 15% and 18%.

Recent developments

Following this decision, on 28 April 2022, the National High Court ruled in favour of another sovereign wealth fund, the Kuwait Investment Authority (KIA).

The Spanish Tax Administration consistently rejected refund applications and subsequent administrative claims filed by KIA, arguing that it was not comparable to any exempted Spanish governmental entities and the case law on investment funds should not apply. However, the National High Court considered that KIA is fully comparable to certain exempted Spanish governmental entities (e.g. the Spanish Fund for Investments Abroad) and, following the 2021 Norges Bank decision of the Spanish Supreme Court, granted KIA the right to obtain a refund of the taxes paid plus statutory interest for late refund, accruing from the 2011.

The National High Court had no doubt about the application of the Norges Bank case law to sovereign wealth funds, and this further decision will, hopefully open the door to affected funds being able to obtain tax refunds not only through litigation, but at earlier administrative stages.

Sovereign wealth funds which may be entitled to tax refunds

Currently, Spain has more than 90 tax treaties in force which, in certain cases, allow sovereign wealth funds and other governmental investors to benefit from a full exemption from Spanish source dividends.

However, in the cases of Norway and Kuwait neither applicable tax treaty has specific provision applicable to governmental entities allowing them to benefit from a general tax exemption on Spanish source dividends. This is also the case in a number of non-treaty jurisdictions, or treaty jurisdictions where sovereign wealth funds or governmental entities equivalent to Spanish exempted entities do not benefit from a full tax exemption under the relevant double tax treaty. Therefore, a significant number of governmental investors in different countries could be eligible for dividend withholding tax refunds if they have suffered dividend withholding taxes in Spain in connection with their investments in Spanish equities. These could include sovereign wealth funds in a wide range of jurisdictions, including for instance Singapore, Saudi Arabia, South Korea, Australia or the United States among others.

Comment

Sovereign wealth funds and equivalent governmental investors suffering tax on Spanish source dividends should explore the possibility of filing dividend withholding tax refund claims based on these case law developments. Currently, any withholding taxes suffered, at least within the last four years, are potentially available for a refund claim. Prospective claimants should note that the current annual statutory interest rate applicable for refunds (3.75% of the amount refunded) should generally cover legal and administrative claim costs.

Our Spanish tax team, which has been involved in a number of these developments at the highest levels (including landmark cases at the Spanish Supreme Court), can advise you on the position.