In a judgment dated March 27, 2019, the Supreme Court established that the justification for restrictions on the movement of capital may only be held valid if set out in the law.
The judgment, applicable to an Irish harmonized mutual fund that obtained a dividend in 2008, before the amendment of article 14 of the Nonresident Income Tax Law, confirmed that article 63 of the Treaty on the Functioning of the European Union prohibits nonresident collective investment vehicles from being taxed at a higher rate than resident vehicles when they receive Spanish source dividends. Both types of collective investment are therefore in comparable positions in that both are subject to tax on the dividends they receive, although one type –nonresident vehicles- bears a higher rate of tax. After finding the restriction, the Supreme Court held that the justification for it (which the Spanish Tax Agency and the lower courts found in a failure to evidence that the nonresident mutual fund concerned had the same characteristics as a Spanish fund) must appear in the domestic tax legislation, as required in article 65 of the Treaty.
Accordingly, the law is compatible with the free movement of capital, and may only make a distinction between residents and nonresidents having regard to their specific factual circumstances, where the domestic lawmakers have set out an ordinary tax mechanism for the nonresident taxpayers to assert their right to the reduced rate. Because there is no such mechanism in Spanish law (since it did not exist in the year under review for harmonized collective investment vehicles and does not exist now for other nonresident collective investment vehicles), there can be no justification for the restriction and, therefore, the withholding tax was in breach of EU law.