Supreme Court ruling of 23 September 2020 on the application of the beneficial owner clause not provided for in the Spanish-Swiss Convention and the limits of "soft law"

The High Court ruled on the appeal (Colgate Palmolive case) and analysed the objective and temporal limits of the so-called dynamic interpretation of double taxation agreements in relation to the application of the benefits of the agreement. Specifically, the Supreme Court analyses whether, in the light of the Comments on the OECD Model Convention (MCOCDE), the condition of beneficial owner can be interpreted as implicit for the application of the Spanish-Swiss Convention which does not contain such an explicit clause in relation to the taxation of royalties.

The High Court has ruled in cassation on the appeal against the judgment of the Nacional Court ratifying the conformity in law of the tax adjustment made to the taxpayer by the Spanish tax authorities in relation to Non-Resident Income Tax (IRNR). The Supreme Court upholds the judgement of the National Court and therefore upholds the taxpayer's claim.

In that adjustment, it was discussed whether the 5% withholding rate provided for in Article 12 of the Spanish-Swiss Convention should be applied to the payment of royalties by a Spanish entity to the group's Swiss subsidiary, or whether, on the contrary, the general IRNR withholding rate should be applied, in application of the beneficial owner clause, since the Administration considered that the beneficial owner of the income had not been the Swiss entity but the group's American parent company.

In this context, the Supreme Court rules in cassation on certain particularly important issues in the field of international taxation and concludes:

• Setting the objective and time limits of the so-called dynamic interpretation of the double taxation conventions signed by Spain based on the MCOCDE, rejecting the application of the figure of the beneficial owner according to the Comments to the MCOCDE, since this concept was not originally included in the precept nor had it been expressly introduced in subsequent amendments in relation to royalties (although it had been expressly incorporated in Article 10 referring to dividends).

However, it should be noted that the Protocol to the Convention itself was amended to expressly provide, in relation to the right to benefit from the convention, for the application of the beneficial owner clause, generally for all income covered by the treaty.

In this respect, the High Court confirms the conclusions it reached in its previous judgment of 3 March 2020 (Stryker case) in which it also stated that:

1. In no case should the interpretation of the Comments to the MCOCDE be projected retroactively to a case regulated by a previous standard.
2. Comments on the MCOCDE can only be used as interpretative rules when they refer to a text expressly accepted by the signatories of the agreement.
3. The interpretation adopted by the Administration and by the Courts cannot contravene the literal interpretation of the agreements, without first assessing the effective tax borne in the other country signatory of the agreement and the possibilities offered by the agreement itself in Article 23 (aimed at the mutual agreement procedure) and its concordants.

Finally, with regard to the clause on the beneficial owner, the Court rejects that it can be applied as a kind of meta-legal rule or natural law which must always be imposed on the rational and legal interpretation of the provisions of the agreement itself. On that basis, the Court concludes that the taxpayer was entitled to apply the reduced rate of withholding tax of 5% provided for in the Convention.

Well, there is no doubt that this new Supreme Court ruling, the content of which has become, by reiteration, case law, has enormous consequences. Under the guise of defending the principle of legality and legal certainty, it denies the interpretative value of the so-called "soft law" which the Court of Justice of the European Union had endorsed in previous judgments.

In our opinion, this doctrine, far from simplifying the future scenario, can produce the opposite effect, and this is because, in the field of international taxation, the interpretative value of "soft law" had been accepted as an integrating instrument, for the permanent development and updating of criteria that are of vital importance for making possible a practical and homogeneous application of the rules contained in the treaties and which must govern extremely complex and dynamic situations. We will see where this change of course leads us.