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Import of tax benefits from another non resident country is not permitted

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Claiming in the country of residence the import of tax credits granted by foreign countries on income obtained in such foreign countries, unless in the case of hidden discrimination, contravenes EC law


The Spanish tax authorities prohibited a Spanish bank from deducting in Spain the withholding at source of interest obtained in Belgium, given that this income, in accordance with Belgian regulations, was exempt in that country and the bank had thus never paid any tax in Belgium. In other words, deduction was being claimed in Spain of an amount that had never been paid abroad. Both the Spanish Corporate Income Tax and the Double Taxation Treaty in force at that time set forth that the income obtained by the Spanish bank had to be taxed in Spain under the principle of worldwide income and, in order to prevent double taxation, the taxes paid in the source country – in this case, Belgium – would be deducted in Spain.

But in this case the bank is not seeking to avoid double taxation, as this has not taken place, but instead is seeking recognition in Spain of the exemption achieved in Belgium. This could be achieve by allowing the Spanish bank to deduct in Spain the tax that would have been payable in Belgium, but was finally not paid. In the area of international taxation this is known as “tax sparing“ and is habitually applied to developing countries, so that tax benefits ofered by those countries will continue applicable.

In the ruling dated 8.12.2011 (C-157/10), the ECJ states that community law does not require Spanish legislation to recognise tax credits granted in other countries, unless proof of discrimination can be provided in regard to that same income obtained in Spain. The Court finally states that it should be the national court which originally brought up the discriminatory issue who examines whether said discrimination has actually taken place, therefore not knowing whether the claim made by the Spanish bank will be successful.

We must conclude that this ruling is somewhat odd, not so much in regard to the conclusion reached, which is obvious, but by the way in which it transfers the matter to the national court, which must then determine whether the national regulations give rise to discrimination among taxpayers in a similar situation. That is, it transfers the significant part of the debate on hidden discrimination to the national court.

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