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Brussels, 28 February 2008

Corporate taxation: Commission requests Spain to amend discriminatory anti-abuse rules

The European Commission has sent Spain a formal request to amend its discriminatory anti-abuse rules in the corporate tax area according to which income originating from specific Member States or territories of the EU is taxed more heavily than domestic income. The Commission considers these rules incompatible with the freedoms of the EC Treaty. This request is in the form of a reasoned opinion, the second stage of the infringement procedure under Article 226 of the Treaty. If Spain does not amend its law within two months, the Commission may refer the case to the Court of Justice.

Làszlo Kovàcs, Commissioner responsible for Taxation and Customs Union said: "I understand that Member States need to ensure that their tax bases are not unduly eroded because of abusive and overtly aggressive tax planning schemes, but the Commission as Guardian of the Treaties cannot tolerate disproportionate obstacles to cross-border activity within the EU." He added: "The infringement at stake again reveals that there is a need for better coordination of national anti-abuse tax rules as the Commission stressed in its December 2007 Communication on anti-abuse rules in the area of direct taxation (IP/07/1878). I invite all Member States (and not only Spain) to explore the scope for constructive and coordinated responses which would strike a proper balance between the protection of national tax bases and the need to observe the freedoms of the Treaties"

Tax treatment of dividends distributed by companies established in particular Member States or territories

Under the national legislation, dividends distributed by companies located in certain Member States or territories of the EU, in which a Spanish company holds a participation of more than 5%, do not benefit from tax exemption while such an exemption would be granted if dividends were distributed from companies located in Spain or in other Member States. The Commission considers that this difference in treatment restricts the free movement of capital.

According to Article 56 of the EC Treaty all restrictions on the movement of capital between the Member States shall be prohibited. The national provisions at issue create a higher tax burden for resident shareholders investing in companies established there and, thus, may have the effect of deterring them from investing capital in the companies having their seat in these Member States or territories. Those provisions are also capable of having the effect of impeding companies located in those Member States and territories from raising capital in Spain. Therefore, the legislation at issue affects market access of both – the distributing companies and the resident shareholders – and thereby constitutes a restriction within the meaning of Article 56.

Spanish "Controlled Foreign Company" legislation

Controlled Foreign Company (CFC) rules typically provide that profits of a CFC may be attributed to its domestic shareholders (usually a parent company) and subjected to current (immediate) taxation in the hands of the latter (whereas normally the parent company would be taxed on the profits of its foreign subsidiary only at the time of distribution). The main purpose of CFC rules is to prevent resident companies from avoiding domestic tax by diverting income to subsidiaries in low tax countries.

Under usual tax rules, a subsidiary, established in one Member State is only taxed in another Member State on the income generated by a permanent establishment (branch) of that company in the latter. Under Spanish CFC legislation, the profits of a subsidiary established in Member States or territories of the EU qualified as tax havens are taxed in the hands of the parent company in Spain as they arise and not only upon distribution, as would have been the case if the subsidiary had been located in another Member State or in Spain.

The European Court of Justice has made clear that, in the granting of a tax advantage, the distinction made on the basis of the subsidiary's seat constitutes a difference in treatment which is not compatible with Article 43 of the EC Treaty, which guarantees the freedom of establishment. The Court has also recently stated that a national measure restricting freedom of establishment may be justified where it specifically relates to wholly artificial arrangements aimed solely at escaping national tax normally due and where it does not go beyond what is necessary to achieve that purpose.

The Commission considers that the Spanish legislation is contrary to Community law: It goes beyond what is necessary, since it is applicable not only to wholly artificial arrangements but also to parent companies controlling subsidiaries carrying out genuine economic activities in those Member States or territories..

Non-deductibility of depreciation provision

Spanish legislation does not allow Spanish companies to establish tax deductible provisions for depreciation relating to holdings in companies located in those Member States or territories.. The Commission considers that the national provisions at issue create a higher tax burden for resident shareholders investing in those Member States or territories than for resident shareholders investing nationally or in other Member States. Spanish legislation dissuades its residents from making investments in other Member States and constitutes a restriction on the freedom of establishment and on the free movement of capital within the meaning of Article 43 and 56 of the EC Treaty.

The reference number of the infringement procedure is 2005/4290.

For the press releases issued on infringement procedures in the area of taxation or customs, see:

For the latest general information on infringement measures against Member States see:

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