Spain: Tax refunds available for European Union hedge funds

In brief

A recent resolution from the Spanish Supreme Court opens the possibility to request a partial refund of taxes and withholdings borne in Spain by some EU hedge funds. Foreign pension funds, sovereign funds and mutual funds can also claim refunds considering previous judgments.

Key takeaways

• Applying the EU principle of free movement of capital, the Spanish Supreme Court has recently confirmed that EU hedge funds are entitled to benefit from the 1% reduced tax rate applicable to Spanish domestic hedge funds as long as certain requirements are met.
• This judgment provides an opportunity to review former transactions performed by EU hedge funds in Spain, as well as to plan for new ways to structure such investments in the future. These refunds could be related to either dividends and interests withholding taxes or capital gains and corporate income taxes paid in Spain.
• Pension funds, sovereign funds and mutual funds may also be entitled to benefit from a reduced or zero taxation and claim any excess paid if certain conditions are met.

In more detail

According to a recent judgment issued by the Supreme Court in April 2023, a foreign EU hedge fund could benefit from the reduced domestic 1% tax rate applicable to Spanish hedge funds on dividends paid by Spanish resident entities, provided that the foreign hedge fund is (i) an EU open-ended entity, (ii) validly authorized to operate in its country of incorporation and (iii) managed by an authorized alternative investment fund manager pursuant to the terms of Directive 2011/61/EU (AIFMD). This leaves room to claim any excess paid on the standard 19% tax rate applicable to non-resident taxpayers (or double tax treaty reduced rates).

This decision comes in addition to previous judgments from the Supreme Court dated March and December 2019, December 2020 and March 2021 concerning the Spanish taxation of pension funds (0%), sovereign funds (0%) and mutual funds (1%), respectively.