background image
Spanish National Court Issues Decision on Capital Gains Tax Exemption for Companies in EEA Countries Outside the EU — Orbitax Tax News & Alerts

A decision of the Spanish National Court was published on 24 May 2023 on whether an Icelandic frozen fish company, Icelandic Group EHF (Icelandic), qualified for a tax exemption on capital gains from the sale of its wholly-owned Spanish subsidiary. The subsidiary was sold to an unrelated Icelandic company, Solo Seafood EHF, in 2016. In January 2017, Icelandic declared the capital gain and self-assessed the Non-Resident Income Tax due, which amounted to approximately EUR 2.5 million. However, in March 2017, Icelandic claimed a refund of the Non-Resident Income Tax considering the exemption provided by Article 14(1)(c) of the Non-Resident Income Tax Act. The claim was rejected because, at the time, the exemption provided by Article 14(1)(c) was limited to companies resident in EU Member States.

Following the rejection of its refund claim, Icelandic appealed on the grounds that the exemption provided for Article 14(1)(c) violated the freedom of establishment regulated in Article 31 of the Agreement on the European Economic Area (EEA Agreement) and violated the free movement of capital regulated in Article 40 of the EEA Agreement. In connection with the appeal, Icelandic presented a complaint to the European Commission, which initiated an infringement procedure against Spain regarding Article 14(1)(c) in 2019. This resulted in Spain amending Article 14(1)(c) as part of the State Budget Law for 2021 to extend the exemption to EEA countries, but with an added condition that there is an effective exchange of information between Spain and the respective EEA country under Law 36/2006 on measures for the prevention of tax fraud. Despite the infringement, and change in law, the tax administration argued that the infringement was justified because Iceland is not covered by EU Directive 77/779/EEC concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation.

In its decision, the National Court addressed two main questions regarding the violation of the freedom of establishment and the free movement of capital and whether the violation was justified for the prevention of tax fraud. With respect to the first question, the Court confirmed that the freedom of establishment and the free movement of capital were violated, especially considering that the law was amended in recognition of the violation. With respect to the second question, the Court found that there is no compelling reason linked to the fight against tax fraud that justifies the exclusion of EEA residents that are not members of the EU from the scope of the exemption. The Court dismissed the tax administration's position that the effective exchange of tax information be comparable to that which operates within the framework of Union Law (whether through Directive 77/799/EEC or through Council Directive 2011/16/EU on administrative cooperation in the field of taxation, which repealed the former). In the case of Iceland, the Court found that both Article 26 (Exchange of Information) of the Iceland-Spain tax treaty and the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters can serve to meet the exchange of information condition for the exemption.