EU Court of Justice: refund of withholding tax on dividends to non-resident loss-making companies

by Davide Attilio Rossetti, Anna Miotto

The EU Court of Justice, in its decision in Case C-601/2023 of December 19, 2024, expressed the principle of law according to which Article 63 TFEU precludes the application of national legislation under which the withholding tax levied on dividends received by a resident company is equivalent to an account payment of corporation tax and is reimbursed in full if the fiscal year closes with a tax loss, whereas no reimbursement is provided if the dividends are received by a non-resident company in the same situation.

The case

In the fiscal year 2017, a U.K.-resident company received dividends from a subsidiary resident in Biscay, subject to a withholding tax at the reduced rate of 10%, as provided by the Spain-U.K. Convention for the avoidance of double taxation.

In 2021, the U.K. company claimed a refund of the withholding tax from the Spanish tax authorities, justifying the request on the ground that it was an overpayment.

Having its claim rejected, the company appealed to the Superior Court of Justice of the Basque Country, the referring court, on the following grounds:

  • I. the year 2017 had ended in tax losses that could not be compensated with the amount withheld as withholding tax on dividends;
  • II. the Spanish discriminatory treatment that allows resident companies to deduct the withholding tax from the corporation tax or to claim the reimbursement of this amount in the event of a tax loss; an option that is not allowed for foreign loss-making companies;
  • III. the non-reimbursement of the withholding tax by the UK, which only recognizes a tax credit for taxes paid abroad;
  • due to these arguments, the company complained that the Spanish law conflicted with the right of free circulation of capital according to article 63 TFEU.

The decision

In this ruling, the European Judges have criticized the Spanish legislation for the unequal treatment for dividends distributed to non-resident companies with tax losses.

First of all, the Court remarks that within the scope of measures prohibited by Article 63(1) TFEU, as restrictions on the movement of capital, are also those measures that may discourage non-residents from making investments in a member state or discourage residents from making investments in other states.
Consequently, the (more) unfavorable tax treatment reserved by a member state to dividends received by foreign companies, compared to the treatment applied under similar conditions to resident entities, must be considered as creating an undue restriction on the free movement of capital, which is prohibited by Article 63 TFEU.

In fact, dividends paid by a company established in Biscay to another resident company are subject to a 19% withholding tax, fully refundable if the fiscal year closes with a tax loss.

Under the same conditions, this treatment does not apply in the case of the distribution of dividends to a foreign loss-making company, which will have a definitive withholding tax.

Based on those considerations, the Court concluded that “the [Spanish] legislation affords an advantage to loss-making resident companies, [resulting in] a treasury advantage or an exemption, where non resident companies are subject to definitive taxation, regardless of their operating results”.

This decision allows for some reflections on the Italian legislation compared with the Spanish one.

The Italian legislation seems to be aligned with the “Foral” law, as the distribution of dividends operated entirely on national territory does not incur any withholding tax which, however, is applied when dividends are distributed to non-EU entities.

Moreover, the withholding mechanism is the same as in Spanish law.

Lastly, the ruling of the Court, by providing foreign loss-making companies with the possibility of claiming refunds of amounts withheld permanently on dividend distributions, could open the door toward harmful tax practices, allowing the creation of (loss-making) companies on non-EU territories finalized to the exclusive purpose of transferring money (dividends) that would then not be subject to any form of taxation.