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Tax treaties in Spain and non discrimination clause in thin capitalisation rules

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The non discrimination clause in a double taxation system prevents the application of thin capitalisation of companies in Spain


The Tribunal Supremo ruling of 17.03.11 examines the possible application of the Spanish regulations designed to prevent thin capitalisation regulations in a Spanish company receiving funding from its parent company in Switzerland. We must remember that thin capitalisation is an anti-abuse measure designed to prevent Spanish society from having too many expenses, with the aim of reducing the Corporate Income Tax base as much as possible. The way to do this is for the Spanish company to pay interest for such loans to the parent company. Such interest is tax deductible in Spain and thus contributes towards reducing the tax payable in Spain.

We must remember that the ECJ, in its Lakhorst ruling (C-324/00), declared that such anti-abuse measures cannot be applied to companies within the EU, as it means treating non-national companies differently from national ones (hidden discrimination), which was subsequently argued in Spain in the Tribunal Supremo ruling of 1.10.2009 in regard to a Spanish and Dutch company.

What is interesting about this ruling is that it reaches the conclusion that the regulations regarding thin capitalisation likewise cannot be applied to the Spanish and Swiss companies but not for reasons of EU legislation (as Switzerland is not part of the EU), but as a result of a non-discrimination clause in the double taxation treaty between Spain and Switzerland.

This ruling thus helps to prevent the application of thin capitalisation rules but is restricted in practice to the application thereof in non European countries with which Spain has no double taxation treaty.

Furthermore, the ruling discusses the concept of indirect indebtedness, which it also justifies, in the event of confirmation by the administration and within the aforementioned limits, of the anti thin capitalisation regulations.

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