An advisory report issued by the Tax Authorities has been published recently in their official website, referring to a Spanish conflict-of-law case, related to the possible withholding tax obligations applicable on payments of interest made to a Non-Resident company.
Please find attached this report (in Spanish).
In this particular case, the Tax Authorities analyse the applicability of withholding tax on interest paid by a Spanish company belonging to a US group to a related Dutch shell company, considering that the amounts owed by the Spanish company were actually due to the US parent company.
The advisory report refers to the withholding tax on Non-Residents income tax on interest paid to a non-resident Dutch shell company.
In this case, the Dutch company is not the beneficiary of this income, but a purely shell company without actual presence in the Netherlands, acting as a mere intermediary “de facto”.
In this sense, the Netherlands’ Tax Authorities provided Spain with spontaneous information on the status of this Dutch company, stating that this entity did not fulfils all the requirements stated in the Netherlands to companies paying or collecting interest.
- This company does not have employees.
- Its domicile is located at the legal domicile of a trust office where more than 4.000 companies are domiciled.
- The Dutch Tax Authorities state that this company does not have actual presence and substance in the Netherlands.
- The members of the Board of Directors are Dutch residents with management positions in the trust office, or American residents and are managers of the American parent company.
- The Dutch company obtains exclusively financial income, which in more than 99% correspond to the amounts borrowed by the Spanish company, and the only asset in the Dutch company are the loans granted to the Spanish company,
- The liability of the Dutch company is composed by debts incurred with the US parent company.
- All the amount lent to the Spanish subsidiary is obtained through loans obtained from the US parent company, and its expenses correspond to the interest accrued on the amounts lent by the US parent company.
- The Dutch company transfers its income to the US shareholder through dividends distributions and by making available its cash surpluses.
- The agreements subscribed between the Spanish and the Dutch companies are ruled by the Laws of the state of New York.
Those elements evidence that the Spanish subsidiary is financed by the US parent company through the Dutch company. In addition, the payment order does not come from a Dutch bank, but directly from a US branch of the bank.
This leads the Tax Authorities to the conclusion that the origin of the funds obtained by the Spanish Company is located in the US and, in particular, in the US parent company.
Therefore, the only function performed by the Dutch company is to serve as a tool for channelling funds between the two intervening parties, the US and the Spanish company: receiving funds from the US shareholder to finance the Spanish company: with the interest earned from this company it pays interest and distributing dividends to the US company, and with the principal repaid by the Spanish company, it pays back the capital lent by the US shareholder.
In consequence, the Tax Authorities consider that the parent company, and not the Dutch company, is the actual beneficiary of this financial income, as this company receives the financial income from the transaction through interest, dividends and the cash surpluses made available by the Dutch company.
The Tax Authorities conclude that transactions, considered as a whole, are cunning and artificial with the purpose of obtaining a tax advantage: the reduction of the taxation in Spain.
Carrying out the usual transaction that corresponds to the economic substance of the interest payments, the Spanish company would have been obliged to withhold 10% on the amount paid (as per the USA-Spain tax treaty).
