Credit Suisse Securities (Europe) Ltd, a non-resident entity, with operating losses, received dividend payments from a resident entity in the fiscally autonomous Province of Bizkaia, Spain. These dividend payments were subject to withholding tax - 10% rate, as per the Double Tax Treaty (DTT) between Spain and United Kingdom. In this context, Credit Suisse asked the Bizkaian tax authorities to refund the withholding tax applied to the dividends, but the request was denied.

Credit Suisse filed an economic-administrative claim with the Economic-Administrative Court of Bizkaia, which dismissed it. As a result, the Company filed an appeal with the High Court of Justice of the Basque Country, which is the referring court that submits the question to the Court of Justice of the European Union (CJUE).

The core issue in this case is the differential treatment in the reimbursement of withholding tax on dividends between residents and non-residents:

1. Non-Residents: Credit Suisse, as a non-resident, was not reimbursed for the withholding tax on the dividends. This is because non-residents cannot offset this tax under the DTT between Spain and the United Kingdom on the elimination of double taxation when the company is operating at a loss.
2. Residents: In contrast, residents who suffer financial losses during the financial year are reimbursed for the withholding tax in full.

This Judgement of the Court addresses whether the differential treatment between non-residents and residents regarding the reimbursement of withholding tax on dividends constitutes a restriction on the free movement of capital, which is prohibited under Article 63 Treaty on the Functioning of the European Union (TFEU).

In this sense, the CJUE understands that the non-reimbursement of withholding tax to non-residents is a restriction on the free movement of capital, as it places non-residents at a disadvantage compared to residents, which could deter cross-border investments. This is contrary to the objectives of the EU's internal market.

The Spanish tax authorities argue, based on Article 65 TFEU, that the differential treatment is justified by legitimate objectives, such as:

1. Ensuring the effective collection of taxes and preventing tax evasion
2. The balanced allocation of taxing rights between Member States and the prevention of the risk of double deduction of losses
3. Maintaining the coherence of the tax system.

Regarding the effective collection of taxes and preventing tax evasion, the CJUE considers that the refund of the corresponding withholding on dividends is not opposed to this principle, given that such reimbursement is an exception to the principle of taxation during the fiscal. Thus, it is not intended to be applicable to the majority of companies receiving dividends, but only to those that register losses. Furthermore, the Court emphasizes the following:

i. The non-resident taxpayer shall provide the relevant elements that would allow the tax authorities of the Member State of taxation to verify that the legal requirements established to benefit from the refund of the withholding tax at source are met.

ii. Mutual assistance mechanisms between tax authorities of different Member States are sufficient to allow the Member State of source to verify the accuracy of the information provided by the non-resident taxpayer that seek to benefit from the refund.

With respect to the balanced allocation of taxing rights between Member States, the Court argues that based on European jurisprudence, to the extent that a Member State has decided not to tax resident companies on dividends of domestic origin in certain cases, it cannot invoke the need to ensure a balanced allocation of taxing rights between Member States to justify taxing non-resident companies that receive such income. Additionally, the Court reminds us that the Member State of source does not renounce its right to tax such income, it only defers such taxation until the non-resident entity obtains benefits.

Lastly, in connection with the last argument raised by the Spanish tax authorities, maintaining the coherence of the tax system, the CJUE reiterates that for such claim to succeed, it is necessary, according to established case law, to demonstrate the existence of a direct link between the tax advantage in question and the offsetting of that advantage by a specific tax levy. In this sense, the resident entities are not subject, as a compensation to the withholding refund, to another tax, and therefore it cannot be accepted that the contested legislation in the main proceedings is justified on such grounds.

Consequently, the Court has ruled that Article 63 TFEU must be interpreted as opposing a regulation under which a reimbursement request of withholding on dividends, from a non-resident company at a loss-making position, is not acceptable, whereas residents who suffer losses during the financial year are reimbursed that same tax in full.