In a decision on 25 October 2013 in the Brambles France case (appeal No 1374/2011), Spain’s Supreme Court ruled that the capital gains tax on non-residents may be discriminatory in some cases.
The case involved a French company that sold its shares in a Spanish subsidiary in 2002. It made a capital gain of EUR15.3m on the sale, which attracted a CGT rate of 35 percent. The French company had a substantial ownership in the subsidiary, i.e. in excess of 25 percent. Accordingly, the capital gains were taxable under Spanish law, and article 13-2 of the Spain/France tax treaty provided for concurrent taxation by both countries. Under Spanish domestic law, resident companies may claim relief from CGT arising from sales of shares, provided a minimum 5 percent ownership criterion is met. CGT is calculated at the standard corporation tax rate (35 percent at the time), but a tax credit may be claimed on the part that is in fact derived from undistributed profits.
CGT relief aims to avoid economic double taxation, so that the after-tax profits of a Spanish company may flow through another Spanish company without further taxation. A similar tax credit would have applied for dividends, providing the shareholder held a minimum 5 percent stake. The Spanish subsidiary had undistributed profits of EUR 3.6m. Accordingly, the taxpayer was denied a EUR1.25m tax credit, which is quite substantial.
As there is no CGT relief for non-residents, the key issue in this case was to determine whether there was illegal discrimination. According to the Supreme Court, resident and non-resident companies were in a comparable situation despite the different tax treatment. Therefore, the Court found there was illegal discrimination against non-resident taxpayers if tax relief was denied. The Court’s reasoning was primarily based on existing ECJ case law, namely the cases Denkavit Internationaal BV (C-170/05) and Commission v. Spain (C-562/07). As the decision solely relied on EU law, the Court refrained from looking at whether there was prohibited discrimination under treaty law.
The Supreme Court also held that the capital gains tax provisions were against the EU principle of freedom of capital, even though the non-resident taxpayer held a substantial participation in the Spanish subsidiary. As a general rule, the EU principle of freedom of capital is extendable to non-EU countries, whereas the principle of freedom of establishment is limited to intra-EU movements. In addition, as it solely relied on EU law, the Court refrained from looking at double tax treaty law and check whether the French parent was able to claim a foreign tax credit in France.
