Free movement of capital allows for recovery of withholding taxes at source in case of losses

The Judgment of the Audiencia Nacional (Administrative Chamber, 2nd Section, of 28 July 2025, procedure number 2486/2021) marks a milestone in the application of European Union law in Spain, especially in relation to the free movement of capital.

The British entity Credit Suisse Securities (Europe) Ltd. initiated proceedings for the refund of withholding taxes levied on dividends received both in Spain and in the Provincial Council of Bizkaia. It claimed that, having registered tax losses in the United Kingdom, those withholdings became a definitive tax charge, with no possibility of offsetting.

In contrast, an entity resident in Spain, in the same situation, could recover those withholdings through corporate income tax, since they are considered payments on account. If the result for the year is negative, the amount withheld is refunded.

If the UK entity had obtained profits, it could have avoided double taxation through the mechanisms provided for in the Double Taxation Agreement signed between Spain and the UK. However, as these are losses, the UK tax authorities do not refund withholdings paid in another state, and Spanish non-resident income tax (IRNR) legislation does not provide for this possibility of refund either.

This difference in treatment between resident and non-resident companies in situations of losses is discriminatory and infringes Article 63 of the Treaty on the Functioning of the European Union (TFEU). This was established by the Court of Justice of the European Union (CJEU) in its judgment of 19 December 2024 (Case C-601/23), in response to a question referred for a preliminary ruling by the High Court of the Basque Country in an appeal brought by Credit Suisse Securities (Europe) Ltd:

"Article 63 TFEU precludes legislation which allows dividend withholding tax to be refunded to resident companies in the event of losses, but not to non-resident companies in the same situation."

The Audiencia Nacional directly applies this ruling of the CJEU, and extends its interpretation to the state IRNR regulations, concluding that both the provincial and state regulations violate the free movement of capital for the same reasons.

The case law of the CJEU, in interpreting Article 63 TFEU, has priority and direct effect in the Spanish legal system, as recognised by Article 4 bis of the Organic Law of the Judiciary (LOPJ) and the Supreme Court.

Although the ruling is not final and can be appealed in cassation by the State Attorney's Office before the Supreme Court, non-resident taxpayers without a permanent establishment in Spain who, in the last 4 financial years, have paid dividend withholdings in the common territory or in the Provincial Councils, and who can prove that they have not been able to offset them due to losses, are recommended to initiate a procedure for the refund of undue income. This will allow, among other reasons, the interruption of the statute of limitations on their right to such a refund.

This ruling is in line with the ruling of the Supreme Court - STS 1254/2025 (24 March 2025) which declares that refusing to refund withholdings to non-resident and non-harmonised funds violates the free movement of capital (art. 63 TFEU) if they are comparable to Spanish CIIs. Comparability must be assessed on the basis of substantive criteria (purpose, openness, supervision, authorised manager), not formalisms.

These rulings reinforce the primacy of EU law and guarantee equal treatment between resident and non-resident companies or investment funds, not only residents of the EU or the European Economic Area (EEA) but also third countries with double taxation treaties signed with Spain, in comparable situations.

In short, it reinforces the idea that European rules are there to be complied with, and that Spanish courts apply them. This generates confidence, which results in greater legal certainty for foreign companies wishing to invest in Spain.

Read the full article published in Lawer Press and written by Ignacio Mendaro, senior associate, here.