Tax Treaty Case Law around the Globe 2016

S. 29Chapter 3 Spain: Attribution of Free Capital to PEs and Effectiveness of the Authorized OECD Approach

Alejandro García Heredia

3.1. Introduction

The decision of 10 July 2015 by the Audiencia Nacional (National Court) (AN) addresses the issue of the attribution of free capital to PEs of foreign banks. This case examines whether interest paid by the Spanish branch of ING to its head office in the Netherlands is deductible for the purposes of the Spanish non-resident income tax (IRNR). The legal basis of this matter lays both in financial sector standards (minimum levels of regulatory capital) and tax rules (tax treaties and domestic law) and the question is then to what extent regulatory standards may be considered for tax purposes. The solution depends largely on the approach adopted in relation to the attribution of profits to PEs, particularly with regard to the allocation of free capital. For this reason, the problem arises as to which version of article 7 of the OECD Model and its Commentary should be applied in order to interpret the Spain-Netherlands tax treaty (1971). In this sense, the judgment discusses whether a substantial change in the OECD position on profit attribution h...