The Spanish Supreme Court has ruled that Spanish dividend withholding tax levied from Canada’s Teachers’ Pension Plan (TPP) violates the free movement of capital as laid down in the EU Treaty, and must be refunded.
The decision is the first decision by a national court on a refund of dividend withholding tax to follow a ruling by the European Court of Justice (ECJ) ordering Germany to refund the tax to another Canadian pension fund.
The decision by the Spanish court confirms non-EU pension funds are also eligible for a dividend tax refund from the Spanish tax authorities (Fiscalía), said Jeroen van der Wal, chief executive officer of Dutch global withholding tax recovery expert firm Taxology, who brought the case on behalf of the pension fund.
This does not mean however, that the Spanish tax authorities will swiftly start returning unjustly raised taxes to other foreign pension funds.
“The verdict only affects the party directly concerned, which is the Canadian pension fund,” Van der Wal told IPE.
“However, I believe a refund will be made in practice if a pension fund can show to the Spanish tax authorities that they are entitled to it. I don’t expect other pension funds will still have to go to court to get their money back as Teachers’ Pension Plan had to do.”
Though the Spanish verdict is hardly surprising given the earlier ECJ ruling on Germany, it is still significant, according to Van der Wal. “This is a stronger precedent than the ECJ ruling because it was made by a national judge,” he said.
European pension funds had already won cases to claim back dividend withholding tax from Spain. The Netherlands’ largest pension asset manager APG has routinely claimed back all dividend tax from Spain since 2010 on behalf of its pension fund clients, a spokesperson told IPE.
“We also claimed a refund of the taxes paid on Spanish dividend income between 2001 and 2009 in order to be treated equally as Spanish pension funds that are exempted from this tax. We have won these cases and have been refunded all taxes including interest. In recent years, we have successfully claimed refunds of several hundreds of millions of euros in taxes in total,” he added.
PFZW, the second largest pension fund in the Netherlands, confirmed it was also paid back all its unduly paid dividend withholding tax in Spain, with no more claims outstanding in the country.
All eyes on Germany
Now all eyes are on Germany, which, despite the ECJ ruling in November 2019, has not yet started refunding any withholding taxes.
PFZW and ABP both have claimed back dividend withholding tax from the German tax service for periods of up to 17 years ago.
“The German tax service has not yet made a decision on these cases,” an ABP spokesperson said. ABP is currently trying to claim tax refunds in several countries, including Portugal, Italy, Austria, Norway and Poland. However, it did not say how much money is involved in these outstanding claims.
For PFZW, this number is €29m, according to a spokesman.
Despite the clear ECJ ruling on for example Germany, it’s often difficult for a pension fund to claim tax refunds in practice, said Van der Wal. “You can do either of two things: go to court to enforce a refund or file claims protectively and wait patiently until tax authorities start refunding taxes without a court order once they realise they would lose such a court case anyway.”
In response to questions from IPE, the German tax authorities (Bundeszentralamt für Steuern, BZSt), said there’s currently no legal basis for it to start refunding dividend withholding taxes to foreign investors.
“There is currently a legislative process underway for the Abzugsteuerentlastungsmodernisierungsgesetz (a new law on withholding tax) which should transfer the responsibilities for tax refunds to the BZSt.” a spokesperson said.
However this process is yet to be completed, the spokesperson said, adding that ”only once these responsibilities have been formally transferred, the BZSt can start to consider claims for tax refunds from pension funds”.