In the judgment of April 5, 2023, the Supreme Court analyzes whether Spanish tax regulations generate a discriminatory situation for hedge funds (“FIL“) (commonly known as hedge funds) resident abroad.
Spanish tax regulations establish that dividends received by a FIL resident in Spain are subject to a tax rate of 1%, while the same yield paid by a Spanish company is subject to a taxation of 19% for foreign funds (where appropriate, the reduced rate determined by the corresponding double taxation agreement may be applied).
The Supreme Court (“SC” or “Court“) understands that, provided that there are objectively comparable situations between hedge funds resident in Spain and those that are not, the difference in treatment of funds based on a residence criterion is contrary to the principle of free movement of capital established in Article 63 of the Treaty on the Functioning of the European Union (“TFEU“).
According to the TFEU, differentiated treatment to situations which are objectively comparable must be sufficiently justified by overriding reasons relating to the public interest and such reasons must be interpreted restrictively in so far as they constitute a limitation on the principle of the free movement of capital. The SC considers that these reasons are not given for the differentiation of treatment of resident and non-resident FIL in Spain.
