The Compatibility of the Spanish Windfall Levy on Credit Institutions with EU Law and International Economic Law (Investment Law and Tax Treaties)¹

Windfall taxes targeting the excess profits of companies operating in certain core sectors, such as energy, retail, or banking, are tax policy instruments used to curb short-term economic emergencies and instabilities such as inflation and hyper-inflation over a temporary period (e.g., during wartime). Windfall distinguishes between an enterprise’s gains due to luck (fortuitous gains from unanticipated events) from those coming from the effort of the enterprise (Hebous, Prihardini and Vernon 2022).

Historically, windfall taxes have been designed either as excess profits or excise taxes. An example of the former category is the wartime excess profit tax levied during World War I, which was introduced in Sweden, Denmark, and the UK to tax net incomes in excess of pre-war levels (Kades 1999). An example of an excise tax is the 1980 US Crude Oil Windfall Tax, which was imposed on the difference between the market price of oil and a statutory 1979 base price adjusted quarterly for inflation and state severance taxes (Lazzari 2009). Regardless of a more detailed analysis of the above-mentioned windfall taxes and their context (Diniz Magalhães and De Lillo 2023), we would like to stress two main conclusions drawn from history for the success and legitimacy of these taxes.

Firstly, windfall taxes should target extraordinary profits on an unearned reward. These are obtained by luck, without a given enterprise’s efforts and without discriminating against other sectors that could have obtained similar profits. The wartime excess profit taxes, for example, did not fall under these circumstances. They taxes did not properly distinguish between extraordinary profits derived from the war and general profits; indeed, it was almost impossible to define a normal level of profit in a pre-war situation. They also were not imposed upon farmers, though they also achieved high profits during the war, leading to concerns about unjustified discrimination (Kades 1999, 1541–1546).

The 1997 UK windfall tax on privatized utilities, which had made record profits after the Tory government sold them to investors. suffered from the same problem of not having a genuine windfall element (Waede 1999; Chennells 1997; Dilnot and Giles 1996). Firstly, the definition of “privatized utility” was not clear. Also, the excess profit had already been taxed as a capital gain on shareholders, who sold their shares immediately following privatization, making the tax retroactive.⁷ We do not agree that windfall taxes cannot be retroactive, although this may trigger issues with regard to investment treaties (see Section 5). As explained by Kades (1999, 1552), the government can always tax when unearned rents are detected.

Secondly, windfall taxes should be easy for tax administrations to collect, provided the benefits in terms of revenue exceed compliance costs. In the case of the 1980 US Crude Oil Windfall Tax, enforcement costs were not counterbalanced by revenue increases (Thorndike 2005). In the case of the 1997 UK windfall tax on privatized utilities, the revenue collected was intended to contribute to the provision of welfare benefits. However, due to the massive reduction of staffing levels by former state-owned utilities, the cost of the increased unemployment benefits (£6.5 billion) exceeded the £4.8 billion raised by the windfall tax (Tickell 1998).

Therein lie the difficulties in designing legitimate windfall taxes, which must avoid being perceived as taxes on general profits. If they are perceived as taxes on general profits, they can be easily challenged for triggering double taxation. The fact that corporate taxes are not progressive makes states react with windfall taxes to tax abnormal profits derived from anomalous economic phenomena. In fact, some authors (Diniz Magalhães and De Lillo 2023), have proposed shifting to progressive corporate taxes as an alternative solution to avoid these difficulties. Such a shift is not currently being discussed by the legislator.

Recent literature has been quite favorable towards the introduction of an excess-profits tax – for example, to tax extraordinary profits derived entirely from the pandemic (Avi-Yonah 2020; Hebous, Prihardini and Vernon 2022). Is it legitimate to levy a tax on such extraordinary profits that arose simply due to luck? In the economic literature, there is room for disagreement with taxes on unexpected and unearned profits. Firstly, as the previous section demonstrated with wartime profit taxes, it is not easy to distinguish between windfall profits arising from commodity price surges and from those connected to underlying economic rents. In light of this, several authors have rejected temporary one-off windfall taxes, instead advising countries to introduce a permanent tax on economic rents (excess profits) tailored to different stages in the energy value chain. In effect, this also taxes profit derived from increases in energy prices (Baunsgaard and Vernon 2022).

Secondly, the windfall imposition will eventually affect investors, who will terminate their investments if the dividends to be received from companies subject to the tax are less than initially expected due to the temporary windfall tax: “Investors prefer a stable, predictable tax regime over the risk of future temporary taxes when prices rise” (Baunsgaard and Vernon 2022, 5).

Conversely, and based on the historical experience described in Section 2.1, Kades (1999) powerfully argues that the State should tax and redistribute windfalls, provided that actual windfalls exist. This is on the condition that the benefits of taxation exceed the cost of capture. His first argument is that windfall taxation does not distort private behavior. On this point, he argues that taxing unexpected income is always ex post (after a windfall) and will not make consumers change their behavior. Windfall taxation is akin to taxing tobacco. The consumer could continue consuming tobacco, although his choices are more expensive.

Kades’s second argument introduces the idea of “reverse insurance”, thereby yielding a symmetrical treatment of bad and good luck (ibid., 1498). While conventional insurance spreads the “risk” of unpleasant surprises, reverse insurance (windfall taxation) captures and redistributes the “risk” of pleasant surprises. Kades assumes that our citizens have a baseline risk aversion:

In a nutshell, Kades’s benchmark for legitimate windfall taxes works as follows: windfall taxation should be levied if the windfalls are large, easy to detect, and if their benefits exceed the cost of capture. The idea behind windfall taxation is that any profit above normal profit is deemed to be excess profits, and is thus taxed. Windfall taxation rejects taxing general profits, which are traditionally subject to corporate income tax.

The Spanish WT on banks and credit institutions is not unprecedented. The UK government did the same with the 1981 bank windfall tax. In 1981, due to record levels of inflation and high interest rates, banks made vast profits while paying out little or nothing to savers for their deposits. Thatcher’s government decided to introduce a 2.5% windfall tax on bank deposits, charged by reference to non-interest-bearing sterling deposits in excess of £10 million averaged over the final three months of 1980. Curiously, the tax was mostly welcomed by commentators and the media. The UK windfall was justified by the increase of bank profits, which had been derived from high interest rates, in contrast with the overall recession in other business sectors.⁸ Turning to the Spanish WT, in our view, the “reverse insurance” justification presented by Kades could be applicable to assess the legitimacy of the current Spanish WT. There must be a symmetry between the legal treatment of bad and good luck. Due to effects of the global financial crisis (2009–2015), the costs of bailout programs to Spanish banks amounted to €69.7 billion. Of this sum, €41.8 billion was put up by the State through the FROB (“Fondo de Reestructuración Ordenada Bancaria”).9 It is likely that €26.3 billion of this total State investment will not be recovered.¹⁰ To the extent that the State approved bail-out mechanisms to rescue the banking sector and prevent collapse of the financial system, the extraordinary profits obtained by credit institutions due to high interest rates under the current inflationary momentum deserve to be captured in a one-off windfall tax.

The above-mentioned symmetry justifies the State’s taxation of extraordinary profits. In the Preamble of Law 38/2022, the Spanish legislator makes deliberate reference to this idea of symmetry:

Turning to the Kades’s benchmark for assessing the legitimacy of a windfall tax, the first requirement is that the windfalls are large and easy to detect. The Preamble of the Spanish law predicted extraordinary profits due to the European Central Bank (“ECB”)’s increased interest rate, and this is now being corroborated by the record profits published by the Spanish banks in 2022.¹¹ These economic results from the largest Spanish banks are greater than those of many other European banks.¹² The windfalls are large and derived from an unearned reward, obtained by luck and without the enterprise’s efforts.¹³ Unfortunately, current accounting rules (“GAAP”) approved by the Financial Accounting Standard Board (“FASB”) after 2015 do not separate extraordinary, unusual gains from operating results.¹⁴ The reason given for prohibiting the presentation and disclosure of extraordinary items was to alleviate uncertainty for accountants, auditors, and regulators and simplify their work.¹⁵ This regrettable policy from the FASB jeopardizes the precise calculation of the windfalls derived from interest rates in the current inflationary context.

The second requirement is that the method of capturing windfalls (e.g., the design of the taxable base) is simple and cost-effective. In our view, the taxable base of the Spanish WT is easy to calculate (sum of the net interest income and net commission income) and adequate for taxation of the windfalls.¹⁶ In Lithuania, a similar windfall tax on the banking sector formulated its taxable base as net interest income exceeding 50% of the average of the last four regular financial years.¹⁷ Consequently, in the banking sector, the magnitude of “net interest/net commission” has seemed adequate for calculating windfalls derived exclusively from the rise of interest rates to combat inflation.

Other countries, such as Croatia and Bulgaria, have proposed windfall taxes on excess profits for all corporations whose taxable base demonstrates a surplus profit. In Bulgaria, the taxable base is calculated as the difference between the tax profit for the period 1 July-31 December 2023, minus 50% of the average value of the tax profits during the period 2018-2021, increased by 20%.¹⁸ In our opinion, the latter taxable base as a surplus profit is more complicated to connect with extraordinary profits from simple luck, and the increase of 20% seems arbitrary. Hence, the Bulgarian tax could result in the same problems as the 1997 UK windfall tax on privatized utilities.

In our view, categorizing the Spanish WT as a non-tax property contribution for public purposes would not impede assessment under the EU Fundamental Freedoms. The CJEU has endorsed a broad meaning for the term “tax,” only requiring a tax to be mandatory and to generate public revenue.²⁰ It is irrelevant whether the collection of a tax is earmarked for a particular use or responds to several listed general interests. Such a broad concept of “tax” in EU law serves a harmonization goal: the broader the concept of tax, the wider the scope of certain harmonization measures and the fewer obstacles there are to the EU internal market (Martín Jiménez 2018a, 177). The final draft of Law 38/2002 stresses that the proceeds of the Spanish WT will be paid into the State Treasury. However, it also makes clear they will be used to finance specific measures addressing the temporary increase in public expenditure resulting from policies to mitigate the economic impact of Russia’s invasion of Ukraine. There has been extensive domestic controversy over whether the Spanish WT is to be regarded a tax or a non-tax contribution, and this has a significant impact on any compatibility analysis under the Spanish Constitution. In addition to this, the broad definition of “tax” under EU law permits the Spanish WT to be tested under EU Fundamental Freedoms.

As stated in the introduction concerning the scope of the tax, foreign banks operating in Spain through domestic branches are de facto not subject to the tax. This is alongside Spanish banks, which are below the EUR €800 million threshold of interests and commissions. Thus, Spanish banks and credit institutions subject to the Spanish WT are worse off than (i) Spanish banks below the quantitative threshold;²¹ (ii) foreign banks operating in Spain through branches; and (iii) banks resident in Member States without a similar windfall tax in their countries. Some commentators argue that this treatment breaches the EU principle of non-discrimination (Casado Ollero et al. 2022). They refer to a general principle of equal treatment in EU law that aims to ensure that all persons and enterprises doing business in the EU should be treated in the same way. These commentators suggest applying the abundant case law from the CJEU on indirect discrimination in tax matters to argue that there has been a breach of the EU Fundamental Freedoms.

We do not adhere to this interpretation. If such an alleged EU principle of equality exists, there would not be differences admitted in EU Law between, for example, corporate and personal income tax rates amongst the Member States. All enterprises should be subject to the same level of taxation, regardless of their Member State. It is thus obvious that such an equality principle does not apply so broadly to EU law. Taxation is not mentioned in Article 3(6) of the TFEU, neither as an exclusive EU competence (Article 3); a shared competence (Article 4); a coordinating competence (Article 5); nor as a complementary competence (article 6) between the Member States and the EU.

Taxation remains within the sovereignty of the Member States. However, there is no nucleus of sovereignty that Member States can invoke against the Union Action.²² On one hand, under the positive integration channel, the Union has legislative power to harmonize its Member States’ legislation with regard to direct taxation (Article 115 TFEU) to prevent interference or obstacles in the establishment or functioning of the internal market. On the other hand, under the negative integration channel, the CJEU monitors situations of direct discrimination, based on nationality, and indirect discrimination, based on residence. Under this concept of indirect discrimination, the CJEU intervenes when non-residents are treated less favorably than residents (Douma 2022).

In case of the Spanish WT, there is not a situation of indirect discrimination (non-resident enterprises being treated worse than resident enterprises). One may wonder whether it qualifies as a case of reverse discrimination under EU law. In literature, reverse discrimination in non-harmonized areas occurs when a Member State might treat its own citizenless favourably than any other Union citizen (Hanf 2011; Verbist 2017). Reverse discrimination takes place at a conjunction of EU law and national Law; EU law limits its own reach to the transnational aspects of any given subject matter, maintaining the Member States’ powers to regulate the domestic aspects of the issue (treating it as a purely internal situation). Reverse discrimination appears, for example, when the German beer purity laws, only applicable to domestic producers, impose more burdensome requirements than those applicable to beer importers.²³ A situation where nationals of a Member State are subject to stricter treatment as a result of reverse discrimination is remedied when there is either action at the Union level to harmonize a field (e.g., by introducing EU minimum standards), or the Member State amends domestic legislation to carve out this non-favorable treatment for nationals and level it with EU standards. Reverse discrimination is generally tolerated by the CJEU in areas like migration to preserve the Member States’ constitutional identities and avoid “colonizing” national policy domains (Davies 2003; Hanf 2011; Verbist 2017). As the CJEU has insisted, purely internal situations do not fall within the scope of EU law, and it is up to the Member States to apply the constitutional principle of equal treatment to make the states equal. The case law of the CJEU on reverse discrimination has been criticized, for example, in the field of direct taxation (Pistone 2010; García 2009), and in migration law, where the concept of European citizenship should prevent reverse-discrimination outcomes (O’Leary 1996).

Considering the status of the case law, we believe that the CJEU will not change its reiterated doctrine and will still treat the Spanish WT as a “purely internal situation,” since there are no provisions of EU law that impose a similar levy on banks. In a non-harmonized area such as direct taxation, companies must abide by different rules and are subject to different taxes depending on the country in which they operate. The quantitative threshold of EUR €800 million of income from interest and commissions, applicable for both national and foreign undertakings, operates as an argument for rejecting any grounds of discrimination if we consider the case law on progressive turnover taxes (e.g. Vodafone Magyarország).²⁴ While in-scope Spanish banks and credit institutions (e.g., those exceeding the threshold) are subject to the Spanish WT, non-Spanish enterprises operating in Spain are not subject to the tax because they do not reach the threshold. The fact that the tax only exists in Spain leads to a disparity with other Member States.²⁵ As long as the Union legislator (i) does not harmonize by introducing a similar levy (Article 115 TFEU); or it (ii) eliminates potential distortions introduced by a Member State (Article 116 TFEU),²⁶ there is no room to argue for potential discrimination of Spanish entrepreneurs vis-àvis foreign banks.

One point that raises awareness is the compatibility of the Spanish WT with the prohibition of state aid (Article 107 et seq). TFEU aims to prevent distortions of competition in the internal market. As stated previously, Law 38/2022 puts credit institutions with 2019 income from interest and commissions below EUR €800 million in a favorable competitive position. De facto, only one big Spanish bank is excluded (Abanca),²⁷ as well as foreign banks operating in Spain through branches. As Martín Jiménez has stressed, the expansion of the non-discrimination approach under Article 107 (1) TFEU for tax measures, which, as started in Regione Sardegna,²⁸ allows any norm of a Member State specifically aimed at giving advantages to non-residents to be considered unlawful state aid (Jiménez 2018b, 303). Such expansion stretches the boundaries of the selectivity criterion and leaves ample room for the Commission to limit the power of the Member States where corporate taxes are concerned (Martín Jiménez 2018b, 310–311). Likewise, the CJEU ruled in Nuova Agricast that an aid cannot be compatible with the internal market if it contravenes general principles of EU law, such as the principle of equal treatment or the EU Fundamental Freedoms.²⁹ Both legal frameworks – on one hand, the principle of non-discrimination within EU Fundamental Freedoms, and on the other hand, state aid law – are simultaneously applicable for assessing a Member State’s legislation.

The Spanish tax could be assimilated into an asymmetrical levy/charge insofar as it affects several entrepreneurs and excludes other potential ones. The CJEU has dealt with special taxes in a domestic context, including (i) levies affecting private paid-TV operators to finance a state-owned broadcasting organization (DTS v. Commission³⁰), and (ii) levies on direct sales for pharmaceutical laboratories that sold their products directly to pharmacies, with wholesale distributors not subject to the tax (Laboratoires Boiron³¹). Unlike in the previous cases, which yielded differing treatment between national operators, in the case of the Spanish WT, the differentiator is whether undertakings are below or above the quantitative threshold of EUR €800 million.

Several commentators have examined the compatibility of state aid law with special levies and concluded that the current framework of Article 107 TFEU does not adequately respond to the issues of special levies (Schön 2006; Mörmel 2023). In the previous version of the prohibition of state aid in the European Coal and Steel Community Treaty (“ECSC”), there was an explicit reference to special charges, together with state aid.³² The reference to special charges disappeared in the wording of Article 87 EC treaty and the current Article 107 (1) TFEU. The current legislative gap around special levies in Article 107 TFEU enhances tax sovereignty and prevents the use of state aid rules to curtail the introduction of special levies (Schön 2006).

Since special charges are not mentioned in Article 107 TFEU, they are (in principle) out of the scope of scrutiny under state aid law – unless Article 107 TFEU can be applied by analogy. Such an analogy could possibly be made with tax exemptions. Instead of relieving taxation from an existing tax on certain undertakings (exemption), a tax is imposed on a certain category of undertakings (special levy).

However, Mörmel (2003) convincingly rejected such an analogy on basis of two arguments: there are difficulties in (i) determining the reference system (“normal level of taxation”) within the selectivity analysis – “if only a negligible number of undertakings are affected by the special levy compared to the entirely of comparable undertakings, one can hardly with honesty regard its payment obligation as the standard level of taxation”; and (ii) in the recovery of aid for unaffected undertakings. If not being subject to a special charge constitutes state aid within the meaning of Article 107 TFEU, the only possible consequence would be the recovery of the aid from the undertaking that had been favored through being exempt from the tax: “These undertakings would thus have to pay “back” money they never received in the first place, a legal consequence that would be tantamount to the retrospective imposition of a tax” (Mörmel, 3–4).

Despite the conceptual difficulties in scrutinizing special levies under Article 107 (1) TFEU, we argue that the Spanish WT does not constitute prohibited state aid, since it does not meet the selectivity requirement. Firstly, as previously argued, in the case of the Spanish WT, it is not possible to easily define “normal taxation” as a benchmark for the selectivity analysis. Since most Spanish banks are affected by the tax (nine of the 10 biggest Spanish banks), the number of undertakings not subject to it is negligible – they are mainly PEs of foreign entities. It seems that “normal taxation” is the Spanish WT itself. There is no derogation from the ordinary system.

Secondly, although the Court concluded in Regione Sardegna that a tax measure distinguishing between taxpayers based on their domicile could be selective,³³ the cases of progressive turnover taxes in Poland and Hungary have limited the expansion of the non-discrimination approach under Article 107 (1) TFEU ( Vodafone Magyarország, Tesco-Global, Commission v. Poland, Commission v. Hungary).³⁴ Here, the CJEU upheld Poland’s and Hungary’s progressive taxation based on turnover, although the burden of the tax fell mainly upon the non-resident undertakings that dominated the telecommunications market. The fact that only Spanish banks are subject to the Spanish WT because of the EUR €800 million threshold in interest/commissions is merely fortuitous (Vodafone Magyarország, para. 52).

Thirdly and lastly, the Spanish WT, which uses a threshold to differentiate between operators, is justified because it flows from the nature or general structure of the system of which the measures form a part (World Duty Free Group, Banco Santander and Santusa, para. 58).³⁵ It is justified that non-resident undertakings are treated more favorably than resident ones because Spanish banks benefited from the bail-out program during the financial crisis (Section 2.3).³⁶ The “reverse insurance” justification validates the symmetry in the Spanish tax system between the legal treatment of bad and good luck.

The above-mentioned arguments make a case against unlawful state aid in the Spanish WT. The Member States are sovereign to impose special levies upon their undertakings. The respect for the tax autonomy of the Member States in designing their tax systems is in line with the most recent case law of the CJEU, which confirms its tendency toward enhancing the rule of law and the principle of legality in a retained power area like direct taxation.³⁷

As reflected in the previous section, the power to introduce, remove or adjust taxes lies in the hands of Member States. In this respect, each Member State is fundamentally unconstrained in adopting the tax legislation it considers most appropriate to deal with the challenges it faces or to address the societal goals it prioritizes – provided that no discrimination in EU cross-border transactions arises.

Monetary policy, by contrast, is the exclusive competence of the Union for those Member States whose currency is the euro, as established in Article 3(1)©TFEU.³⁸ It is for the Eurosystem (constituted by the ECB and the central banks of said Member States) to conduct the monetary policy of the Union by adopting the measures necessary to carry out its tasks in accordance with Articles 127 – 133 TFEU³⁹ and the conditions laid down in the Statute of the European System of Central Banks and of the European Central Bank (the ESCB/ECB Statute). In this respect, Article 127(1) TFEU establishes as a primary objective the maintenance of price stability. Without prejudice to this objective, this provision also establishes a requirement that the ECB supports the general economic policies of the Union, with a view to contributing to the achievement of its objectives as laid down in Article 3 of the Treaty of the European Union (TEU). In addition, based on Article 127(6) TFEU, the EU legislator adopted in 2014 and Council Regulation No 1024/2013, conferring on the ECB exclusive competence for the micro-prudential supervision of credit institutions via the so-called Single Supervisory Mechanism (the SSM).⁴⁰ The delimitation of competences between tax policy, which is an aspect of the economic policies of the Member States, monetary policy, and banking supervision, which is conferred exclusively to the ECB, cannot a priori prevent tax legislation adopted by the Member States from impacting the objectives and responsibilities of the ECB. It is under this fundamental premise that Article 127.4 TFEU imposes a requirement that national authorities consult the ECB on any draft legislative provision in the fields of its competence. The likely outcome of the consultation by national authorities is an opinion adopted by the ECB on whenever it considers that the draft legislative measure touches upon its responsibilities, as listed in Article 2(1) of Council Decision 98/415/EC.⁴¹ ECB opinions are not binding on the consulting Member States; they are merely informational. This is the case whether they refer to aspects of policy or raise considerations over draft legislative provisions that they deem legally problematic.⁴² Therefore, it is for national authorities to decide whether to take the content of such opinions into account prior to an eventual new draft, or to the adoption of the legislative measure. ECB opinions are far from being a tool equivalent to Article 14.4 of the ESCB/ECB Statute, which allows the ECB’s Governing Council to block national tasks performed by national central banks (NCBs) or subject them to conditions when they interfere with the objectives and tasks of the ESCB. As the CJEU stated when referring to the soft law adopted by the European Banking Authority (“EBA”), the power of ECB opinions is to exhort and to persuade.

ECB opinions have played an important role in highlighting problematic aspects of taxation measures addressed to banks and financial institutions adopted by Member States. Since the start of the so-called great financial crisis (“GFC”), the ECB has adopted several stances on draft legislative measures regarding levies or taxes on banks. These ECB opinions do not exactly reflect the profusion of taxation initiatives addressed to banks proposed in the EU Member States. Rather, they focus on levies or taxes on banks that are not specifically addressed toward allocating resources to resolution funds or to deposit insurance mechanisms. In this respect, the European Council seemed to encourage the adoption of such levies or taxes, noting in its conclusions of 17 June 2010 that “Member States should introduce systems of levies and taxes on financial institutions to ensure fair burden-sharing and to set incentives to contain systemic risk.”⁴³ The ECB explicitly stated in 2010, in relation to levies or taxes on banks that did not have such finality, that the proceeds raised “should preferably accrue to the deposit guarantee schemes or to resolution funds set up ex-ante that would need to be supported by a robust resolution framework.”⁴⁴ In 2011, the ECB welcomed an initiative of the Cypriot authorities that involved using the proceeds of an ad hoc tax on banks for the creation of a financial stability fund, which would provide a fiscal buffer to banking sector risks. In this respect, the ECB noted that “setting up bank resolution funds, financed by levies, has already been addressed by the European Commission, which proposed that all Member States should set up ex ante resolution funds as part of the planned EU crisis management and resolution framework.”⁴⁵ In this statement, the ECB refers to two Communications adopted by the Commission in 2010: “Bank Resolution Funds”⁴⁶ and “An EU Framework for Crisis Management in the Financial Sector”.⁴⁷ The lack of further opinions on the part of the ECB regarding levies or taxes with the purpose of creating deposit guarantee schemes or resolution funds might then be explained by its alignment with the Commission’s considerations in these two Communications.⁴⁸ However, these were not the only type of bank levies and ad hoc taxes that Member States adopted. Member States decided to use their taxation powers for other objectives, namely, to obtain additional financial resources for the state budget without directly addressing the creation of deposit guarantee schemes or resolution funds.⁴⁹ More specifically, between 2010 and 2020, the ECB adopted several stances addressing draft laws imposing bank levies and ad hoc taxes for these other types of objectives.⁵⁰ The ECB opined on these measures on the using the basis of the sixth indent of Article 2(1) of Council Decision 98/415/EC a common denominator, which refers to the duty to consult the ECB on draft legislative measures when these contain “rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets”. Hence, according to the ECB, all these initiatives imposing levies or taxes on banks, whatever their main purpose, had relevance from a financial-stability standpoint. The ECB did not find that these levies or ad hoc taxes were relevant for the transmission of the monetary policy, at least not in an explicit manner.⁵¹ In this respect, it should be noted that the possible interference of the levies or ad hoc taxes imposed on banks with the transmission of monetary policy may not fall within the ECB’s financial stability responsibilities. This has been used as the basis (via the sixth indent of Article 2(1) of Council Decision 98/415/EC) for the ECB’s opinions on bank levies or ad hoc taxes. This may remain the case, unless one considers the transmission of the monetary policy as an overall responsibility encompassing all those established in Article 2(1) of Council Decision 98/415/EC.

This seems to be the ECB’s view, as also put forward in the strategy review. Indeed, financial stability first comes to the surface within the definition and implementation of monetary policy: as the financial sector is of utmost importance for the transmission of the monetary policy, then financial stability becomes a necessary element for effectively pursuing the objective of price stability.⁵² Therefore, the lack of consequences for the transmission of monetary policy needs to be considered as a merit of the respective levy or ad hoc tax, as the ECB could have easily made considerations in this respect in the respective opinions.

In the opinions adopted during the GFC, the ECB proceeded as follows. First, it noted that the imposition of levies or ad hoc taxes on banks for general budgetary purposes should be preceded by a comprehensive assessment of their impact and potential negative implications for the financial sector. Second, it listed the possible adverse effects linked to these types of levies of ad hoc taxes, as a way of facilitating that comprehensive assessment to the national authorities. These likely adverse effects tend to affect banks in three main domains: on their profitability and capital adequacy, on their risk profile, and on their credit policy. In this respect, the impact of the levy or ad hoc tax in the profit and loss accounts of banks might render them less resilient to adverse shocks. Banks might also be incentivized to invest in riskier products to offset the impact of the levy or ad hoc tax with the financial returns obtained in such investments. Lastly, banks may also be inclined to change the terms in which they offer credit to their clients, or to reduce their lending activities.

Once the eventual negative implications of the introduction of a levy or ad hoc tax were indicated and explained, it was then for the national authorities consulting the ECB to assess or re-assess, prior to the eventual adoption of the legislative measure, whether any of the possible consequences would materialize. If they do, it is then necessary to determine whether these negative consequences outweigh the benefits of the levy or ad hoc tax. The ECB did not indicate those potential benefits, possibly because they could be regarded as being linked to a fiscal measure of which it is critical (e.g., to provide financial support to the general state budget) since it might conflict with the general objective of enhancing financial stability.⁵³

The adoption of the Spanish WT by the Spanish parliament in December 2022 did not change the general methodology used by the ECB during the GFC to assess these types of fiscal measures. This is despite a change of context, which this time was characterized by the interest rates adopted by the ECB in its monetary policy stance having a positive impact on the financial results of banks. More specifically, banks benefitted from the income received via the deposit facility rate on the approximately 4.6 trillion euros⁵⁴ of central bank deposits. These were obtained in exchange for the assets purchased by the euro area central banks under the monetary policy purchase programmes (notably, the asset purchase programme and the pandemic emergency purchase programme) that were adopted during the GFC and the COVID-19 crisis. Hence, banks obtained interest income by maintaining their excess reserves within the euro area central bank. As stated in Section 2, it is precisely the positive impact of this interest income on banks’ profits that the Spanish WT under Law 38/2022 aims to capture.

According to the preamble of the Law 38/2022, the proceeds obtained from the levy on banks’ profits are to be used for the financing of measures to ensure an equitable distribution of the burden of inflation across Spanish society. These include an increase of the so-called minimum living income, the revalorization of pensions and the establishment of direct subsidies to wage-earners, self-employed, and unemployed workers in need. It might be argued that these anti-inflationary aspects of the measure distinguish it from the levies and ad hoc taxes put forward by Member States during the GFC. However, the fact that the proceeds of the levy are not ring-fenced and will become part of the general budget will assimilate it with those other past levies and ad hoc taxes adopted with the objective of supporting the state budget, at least in part. In this respect, Article 2(10) of the law 38/2022 states that the proceeds “will be paid into the Public Treasury.”

These differences and similarities are also translated into ECB opinion CON/2022/36, which outlines the methodology used by the ECB to signal the possible impacts of bank levies and ad hoc taxes on its responsibilities (e.g., a petition for a comprehensive assessment and indication of eventual negative consequences). This is combined with a broadening of the areas impacted by the fiscal measure. According to the ECB, the Spanish WT does not only affect financial stability, but also the transmission of monetary policy and some aspects of the prudential supervision of these credit institutions.

In the interest of financial stability, and in line with the referred opinions it issued during the GFC, the ECB stressed the effects of the levy on the profitability of banks. In this respect, the ECB emphasized the uncertain economic and financial environment banks face. This is despite the high interest rate context a priori benefitting banks by means of the interest income obtained in their excess reserves within the central bank. In this respect, the ECB notes that banks’ loan loss provisions are expected to increase due to a foreseeable market slow-down in real economic activity.⁵⁵ Hence, it called for a thorough analysis of the potential negative consequences of the levy on the profitability of the affected banks. This is to ensure that the fiscal measure does not pose risks to bank resilience or provision of credit.⁵⁶ In addition, and as a consideration relevant only for its effect on the profitability of the banks, the ECB indicated that the levy could distort competition as only significant institutions would be affected by the levy, leaving smaller banks and other financial institutions unaffected. The opinion refers to the expected increase in the loan loss provisions of banks as a signal of a market slow-down, which, when taken in aggregate, may represent the impact of the levy on the profitability of banks. This, along with the possible distortion of competition, are matters the Spanish authorities might be expected to consider when making the comprehensive assessment they should undertake prior to adopting the levy (according to the ECB). They are also factors that may be relevant to the study referred to in Article 2(12) of Law 38/2022 to determine whether to maintain the levy on a permanent basis.⁵⁷ Regarding monetary policy, and as previously indicated, the ECB did not raise monetary policy-related considerations on levies or ad hoc taxes addressed to banks with the aim of providing financial support to the general budget. The ECB did, however, put forward specific remarks regarding its potential impact on the monetary policy in relation to the Spanish levy. As with financial stability, these remarks revolved around the impact of the levy on the profitability of the affected credit institutions, as well as the question as to whether undermining the banks’ capital position may, in turn, affect their lending capacity and hence hamper the bank-based transmission of monetary policy measures to the wider economy. However, unlike in past cases in which the ECB opined, the bank levy was precisely addressed to banks’ profits that, according to the preamble of the law, the ECB’s monetary policy had helped create.⁵⁸ The ECB relativized this consideration by noting that the positive financial impact of higher interest rates on the interest income obtained by banks also needs to be considered in the light of other factors that might counterbalance these positive impacts. These include the type and weight of long-term loans, the possibility of a decline in the price of the banks’ security portfolio, or an increase in provisions resulting from a deterioration in the quality of the credit portfolio.⁵⁹ Hence, according to the ECB, the impact of the levy on the profitability of banks should not be considered as the only aspect impacting the financial results of banks, but should also be assessed in the light of the above counterbalancing factors, which may manifest over time.

It is precisely in relation to the consideration that some factors may negatively affect the profitability of banks over time that the ECB raised a technical critical remark against the Spanish WT. Law 38/2022 takes the total reported interest and fee commission income for 2019 as reference to determine which banks have been affected by the levy, while disregarding the risks those banks may suffer in subsequent years. Hence, according to the ECB, “it may be that the [concerned] institutions record low profits or losses at the point of time when the levy will actually be collected.”⁶⁰ Despite this critical remark, this is not an overall veto towards the measure. The ECB seems to have raised this concern as a matter to be further assessed by the national authorities in designing the levy, including the assessment on whether to make the levy permanent as required by Article 2(12) of Law 38/2022, and not as an overall veto towards the measure.

This input-for-further-assessment status of the remarks made by the ECB might be seen in a new light if one considers that ECB Executive Board Member and chief economist Philip Lane welcomed the possibility of eurozone governments taxing corporate profits to finance measures supporting those segments of the population hit hardest by the effects of inflation.⁶¹ According to Lane, these targeted fiscal measures could have an overall impact from a monetary policy perspective, as support via taxes has less of an effect on inflation than an increase in deficit expending. Hence, the monetary policy considerations might then be regarded not so much as a call for national authorities to determine whether the levy should be adopted, but as a call for assessing its effects in the economy, so that the levy’s parameters may be adjusted.

In this respect, it should also be noted that according to the new analyses put forth by the ECB, corporate profits were the dominant driver of inflation, far ahead of wages, during the fourth quarter of 2022 (Arce et al. 2023). Major banks in Spain also reached the end of 2022 with substantial profits compared to the same point in 2021 (Cabo Valverde and Rodríguez Fernandez 2023).⁶² This data may be considered relevant input, not only for the overall justification for imposing a temporary levy on banks, but also for assessing whether to make the levy permanent, as required by Article 2(12) of Law 38/2022.

It should also be highlighted that the role of taxation as a means of absorbing a portion of banks’ profits generated by higher interest rates with the goal of using the proceeds from these taxes to support those affected by higher levels of inflation, might help in ousting initiatives aimed at changing the current Eurosystem monetary policy. In this respect, a levy on banks’ profits might help in maintaining the current role of the deposit facility.

Recent proposals have put forward the possibility of ending the remuneration paid by euro area central banks to commercial banks for their excess reserves. The idea is that this will precisely avoid the so-called windfall profits of commercial banks, while at the same time allowing central banks and the state to keep income that otherwise would be transferred to commercial banks via the deposit facility (De Grauwe and Ji 2023b). As Paul de Grauwe and Ji put it, “[t]he practice of paying interest to commercial banks amounts to transferring monopoly profit to private institutions [b]ut that profit is essentially taxpayers’ money, and it should be returned to the government that has granted the monopoly rights, rather than funneled to commercial banks” (De Grauwe and Ji 2023a). Therefore, according to the above-referred rationale, the levy on banks’ profit would re-allocate part of their lost financial resources to the state budget. Since in normal circumstances, the profits of the central banks go at least partly to the state, then the levy on banks’ profits may be considered a way of channeling these financial resources back to the state via different means.

The losses that several euro area central banks have disclosed in their annual accounts may further show the relevance of De Grauwe and Ji’s statement. This is because these losses are linked with the remuneration paid by central banks to commercial banks’ excess reserves, and at the same time further justify the use of levies or ad hoc taxes on banks’ profits.⁶³ In this respect, when a central bank faces losses, not only would it be unable to allocate part of its profits to the state budget, but it may also need to be re-capitalized by the state at some point in the future if these losses persist.

In a situation where a central bank is suffering losses the state budget may thus be impacted in two ways. Firstly, it would not receive the usual profit distribution on the part of the central bank. Second, the state may have to allocate additional financial resources to the central bank if the latter is deemed unable to operate with substantial losses.⁶⁴ Once again, a levy or ad hoc tax addressed to banks’ profits would allow the part of the financial resources previously allocated to commercial banks via the remuneration of deposits to be channeled back to the state.

The levy also would also have an impact on a particular aspect of bank supervision. Law 38/2022 establishes in Article 2(7) that the amount of the levy shall not be passed on, either directly or indirectly, to the clients of credit institutions. Non-compliance with this obligation is subject to a fine of 150% of the amount that has been passed on to the banks’ clients. By contrast, paragraph 202(e) of the Guidelines on loan origination and monitoring issued by the EBA states that:

This would create an inconsistency between the content of the law and that of paragraph 202(e) of the EBA Guidelines. This inconsistency is highlighted by the ECB in opinion CON/2022/36 where it refers precisely to the Guidelines on loan origination and monitoring to state that “the ECB generally expects credit institutions […] to consider and reflect in loan pricing all relevant costs, including tax observations, when relevant.⁶⁶ The CJEU, in Case C-911/19 Fédération Bancaire Française,⁶⁷ noted that by authorizing the EBA to issue guidelines the EU legislature conferred upon it

In the same judgment, the CJEU also established that those competent authorities must notify the EBA as to whether they comply, or intend to comply, with those guidelines specifically addressed to competent authorities. Failing that, they must state their reasons for their non-compliance.⁶⁹ Drawing from the content of the referred court case, the same reporting and comply-or-explain requirements apply to the guidelines on loan origination and monitoring.

Therefore, despite the referred inconsistency, banks would not be able to defer to the content of paragraph 202(e) of the Guidelines on loan origination and monitoring to avoid compliance with Article 2(7) of Law 38/2022. This is due to the former provision lacking legally binding status. The same applies to the Spanish National Markets and Competition Commission (CNMC), which, in accordance with the same article of Law 38/2022, would need to monitor bank compliance with the requirement of not passing on the amounts of the levy to the banks’ clients.⁷⁰ This monitoring task attributed to the CNMC is also the object of a critical remark by the ECB. This is because the law is silent on the verification mechanism that the CNMC would need to implement when assessing whether credit institutions have complied with their obligation not to pass on the amount of the levy to their clients. This takes into consideration multiple circumstances that may cause an increase in loan prices, especially in cases of inflation and interest rate increase, with resulting difficulties in differentiating between legitimate and prohibited increases.⁷¹

A levy on banks’ profits may have implications for the financial stability and transmission of the monetary policy of the targeted credit institutions, and as well as for their prudential supervision. However, none of these implications pose the issue of illegality. From a financial-stability and (to a lesser extent) monetary-policy perspective, the imposition of a levy on banks may have some adverse effects, but further assessments must still be undertaken on the real impact of the levy to determine whether those effects would in fact materialize. In any circumstance, even if they do materialize, the issue of the maintenance of the levy would still mainly be one of policy, and hence related to its opportunity or to its design.

From the monetary-policy perspective, the levy might even contain a positive policy development. Financial support via taxes to those segments of the population affected by high inflation has less of an effect on inflation than the likely alternative of increased deficit spending. In addition, the levy on banks’ profits may also be considered a mechanism for re-allocating financial resources to the state that would ordinarily be obtained through the profit allocation rules of central banks. From the prudential supervisory perspective, the levy poses a discrepancy with the standards applied by supervisors in relation to loan pricing. In turn, this might also create technical difficulties for the entity tasked with monitoring the requirement that banks do not pass the amount of the levy on to their customers.

The investment tribunal’s jurisdiction stems from so-called arbitration clauses, viz. the investment treaties’ provisions encompassing the host state’s unilateral offer to arbitrate (Waibel 2015). The investor then perfects the consent to investment arbitration proceedings by submitting its arbitration claim against the host state (Björklund 2001).

The question that arises is whether the respective investment treaty allows for arbitration over the host state’s tax matters. The fact that taxation is primarily a matter of domestic law does not, in and of itself, exclude the investment tribunals’ jurisdiction (Gildemeister 2015). Arbitration clauses in Spanish investment treaties are often formulated rather broadly.⁷⁶ For instance, Article 11 (1) of the investment treaty between Spain and Moldova stipulates that “[d]isputes that may arise between one of the Contracting Parties and an investor of the other Contracting Party with regard to an investment in the sense of the present Agreement may be resolved in arbitration.”⁷⁷ Under such a broadly formulated clause, a taxation measure that breaches any international obligations contained in the investment treaty may be reviewed in investment arbitration proceedings. Moreover, if an arbitration clause in the investment treaty is drafted broadly, violations of other norms binding on the host state of a non-investment origin, much like the host state law or the EU tax law, may become the subject matter of the investment arbitration proceedings (Demirkol 2018). A number of investment treaties, however, preclude the possibility of invoking rules contained in a bilateral treaty on double taxation under an investment treaty.⁷⁸ The majority of arbitration clauses in Spanish investment treaties are not restricted only to certain standards.

In addition, if a claim that Spanish WT breaches standards of investment protection is submitted to the ICSID, then the investment must meet also the criteria under Article 25 of the ICSID Convention.⁷⁹ Yet, it does not seem that the interpretation of Article 25 of the ICSID Convention would deem the dispute over the WT to be one not directly arising from the investment (Gildemeister 2015). Lastly, claims for a breach of investment standards related to taxation may be submitted to a host state’s national courts, as foreseen, e.g., by Article 11, para. 2, of the investment treaty between Spain and Iran.⁸⁰ Nevertheless, claims based on investment treaties before domestic courts are few and far between (Rajput 2021).

The tribunal’s jurisdiction additionally requires two interrelated elements of (i) protection of the investment under the applicable treaty and (ii) a protected investor who owns said investment. The majority of Spanish investment treaties contain a rather broad definition of “investment.” For instance, the investment treaty between Spain and China defines “investment” as:

Another good example of a broad definition of “investment” that could eventually protect investors against WT can be found in the investment treaty between Spain and Turkey. It provides that “[t]he term ‘returns’ means the amounts yielded by an investment and includes in particular, though not exclusively, profit…”.⁸²

In relation to the second element, the protected investor, Spanish investment treaties define “investor” rather broadly. For instance, the treaty between Spain and China provides that:

Investment can be made either directly, e.g., when a foreign bank establishes its branch in Spain, or indirectly, through a subsidiary company created under the Spanish law. Another possible claim could arise where permanent establishments (“PE”/branches) of foreign enterprises are subject to the tax. In such a situation, it would be a legal claim to challenge the Spanish WT before an arbitration tribunal. However, this possibility has been de facto excluded in the Spanish law under the threshold of EUR €800 million.

As a result, shareholders in a Spanish bank, whether natural or legal persons, enjoy protection of their shareholding under investment treaties (Julien Chaisse and Lisa Zhuoyue 2016). This holds true for minority shareholders as well.⁸⁴ Spanish banks themselves will not meet the definition of an investor under investment treaties, as they have not been incorporated into another treaty’s party legal order or constituted thereunder.⁸⁵

It is of utmost importance to ascertain what sources of law are applicable to the question of the Spanish WT’s accordance with the state’s international obligations. Investment treaties are the primary source of applicable law here. These, in turn, include a provision laying down the rules on the applicable law. For instance, the investment treaty between Spain and Costa Rica provides that the arbitral tribunal “will base its decision on the norms contained within the present Agreement and other Agreements valid between the Contracting Parties, and on the universally recognized principles of International Law.”⁸⁶ The host state and investor may also choose the law applicable to their dispute.⁸⁷ The distinction must be made between Spanish investment treaties with other EU Member States and those with third countries. The CJEU deems arbitration clauses containing intra-EU bilateral investment treaties as inter se inapplicable.⁸⁸ Most investment treaties between Spain and other EU countries have been terminated, and therefore seem to be no longer applicable. Spain has also signed the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (“Termination Agreement”).⁸⁹ Austria, Finland, Ireland, and Sweden have not signed the Termination Agreement, but according to the available information, none of these states have an investment treaty with Spain.

Thus, an investment tribunal would consider the intra-EU investment treaty to be applicable by virtue of the so-called “survival clause.” The latter extends the application of an intra-EU investment treaty for the period after its termination set out therein.⁹⁰ While the effects of a survival clause will be triggered in the case of unilateral termination by one of the investment treaty’s parties, it seems that the termination of an investment treaty by mutual agreement would also take away the rights of the investors contained in such a treaty (Reinisch and Fallah, 2022). Thus, there is only a slight chance that the theory of acquired rights of the investors under the investment treaty would prevail over an agreement on termination between treaty parties (Reinisch and Fallah 2022).

Moreover, an arbitral award based on an investment treaty between Spain and another Member State would not be enforced against Spain on the territory of Member States. Such an arbitral award would most probably be annulled if the seat of the arbitration is in the Member State, and it would be refused recognition and enforcement in all Member States because it would collide with EU law in both scenarios (Peréz Bernabeu 2023).

Furthermore, the United Kingdom did not sign the Termination Agreement. Thus, a key source of potential claims of British investors against Spain would be the Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part (the “Treaty”).⁹¹ Nonetheless, this Treaty (concluded by the EU on behalf of Member States) contains no investor rights that can be directly enforced, whether against Spain or other Member States (Peters and Wuschka 2023).

Concerning free trade agreements between the EU and third-party states, the recently concluded Comprehensive Economic and Trade Agreement (“CETA”) between the EU and Canada (also ratified by Spain) provides that “an unexpected impact on an investor or covered investment does not, in and of itself, constitute a violation of Article 8.10 (Treatment of Investors and covered investments).”⁹² It is thus rather unlikely that a Canadian investor’s claim stemming from the enactment of the WT would succeed under the CETA.

Furthermore, both domestic law and EU law may have to be used in a dispute concerning the WT before investment tribunals (Hepburn 2017). As far as domestic law is concerned, taxation powers normally find their legal basis in the constitution of the state, as is the case in Spanish law 38/2022.⁹³ However, international law will generally prevail over domestic (constitutional) law before international (arbitral) tribunals (Bassett Moore 1874).

Thus, states cannot easily invoke the constitutional basis justifying a tax to counter an investor’s claim based on violations of standards of treatment contained in investment treaties.⁹⁴ Under customary international law, it is also not possible for the state to exonerate itself from its responsibility for violations of investment treaty standards by a referring to the fact that no such responsibility arises under its domestic law.⁹⁵ In addition to the applicable law in the dispute at stake, EU tax law and bilateral treaties on double taxation remain applicable between Spain and other Member States (see Sections 1–4 and 6 of this article).

As the table in The final sample consists of 629,919 observations over 12 years for 103,073 Norwegian firms. Annex 1 shows, most Spanish bilateral investment treaties do not exclude taxation from their scope.⁹⁶ As a result, if other conditions are met investors may raise investment claims based on the WT allegedly breaching investment standards in the treaty.

Few Spanish investment treaties contain so-called carve-out clauses. This term refers to such investment treaty provisions that exclude certain substantive areas, like taxation, from the treaty’s scope (Ranjan 2022). Some arbitration tribunals have given a broad interpretation to these carve-out clauses to protect tax sovereignty.⁹⁷ This existence of a carve-out clause in an investment treaty has two consequences. Firstly, arbitral tribunals do not possess international jurisdiction to entertain claims falling within the carve-out clause. Secondly, as a result thereof, tribunals cannot declare international responsibility for breaches of investment standards relating to the excluded area of taxation.⁹⁸ A complete exclusion of tax matters thus can only be found in a minority of investment agreements – for instance, in the one between Spain and Nigeria. Other treaties include carve-out clauses regarding certain investment standards, namely national treatment and most-favored-nation treatment.⁹⁹ Hence, it is crucial whether the WT is a tax for the purposes of the carveout clause in the applicable investment treaty. The Spanish legislator does not use the wording “windfall tax” in its Law 38/2022. Accordingly, it describes the WT as a temporary levy with the legal nature of a non-tax property contribution for public purposes.¹⁰⁰ As stated in Section 1 of this contribution, Spanish commentators have argued that despite being named as a non-tax, the Spanish WT is a tax.

It will eventually be for the investment tribunal to choose the correct interpretation of the investment treaty by using the rules contained within the Vienna Convention on the Law of Treaties (“VCLT”).¹⁰¹ There are then two principal approaches to the interpretation of the concept of “tax” in the carve-out clauses.

Firstly, the term “tax” may be interpreted autonomously under the investment treaty – that is, independently from the meaning adopted by the host state’s law.¹⁰² Thus, the Spanish legislator’s avoidance of the term “tax” for the WT is immaterial for the purposes of compliance with such a measure under investment treaty obligations. The label the host state has attached to the levy in its domestic law is not binding on investment tribunals in interpreting investment treaties (Balczerak 2023a).

Such an autonomous approach to interpretation may be found in the investment tribunals’ case law. For example, the tribunal in Stadtwerke München v. Spain, upon consulting various dictionaries for the meaning of “tax” in order to interpret the Energy Charter Treaty (“ECT”), concluded that

Secondly, it is possible to adopt the interpretation of the term under the host state’s domestic (Spanish) law. This returns us to Law 38/2022, which states the WT is not a tax. The interpretation of the term “tax” pursuant to the host state’s law has been endorsed during solar levy disputes under the ECT. For instance, in I.C.W. Europe Investments Limited v. The Czech Republic, the tribunal was satisfied with the Czech Republic’s position, which referred to its domestic law in order to interpret of the term “taxation measure” for the purposes of a carve-out clause.¹⁰⁴ Accordingly, investors in potential investment cases against Spain could argue that the term “tax” or “taxation measure” in the carve-out clause does not cover the WT, as it is not a tax under Spanish law (as is openly admitted by the legislator in Law 38/2022). As a result, the WT is not excluded from the scope of the investment treaty.

The investor could challenge the Spanish WT on a twofold basis: 1) the international obligation not to expropriate without compensation and 2) the standards of treatment of investments. Standards of treatment refer to generally formulated international obligations of the host states laid down in investment treaties. If the host state violates one or more of these standards, international responsibility will be invoked, and an investor may request compensation for damages or another available remedy.

One group of standards of treatment under investment treaties includes fair and equitable treatment; full protection and security; and prohibition of arbitrary measures impairing the use, management, enjoyment, or disposal of the investment. Their common denominator is that the host state must provide a certain level of treatment of the investment and investor, regardless of whether the domestic subjects enjoy the same level of protection. Another group of standards encompasses the national treatment; most-favored-nation treatment; and the prohibition of discriminatory measures that require such comparison with a domestic or foreign subject.

Here, to successfully claim a violation of the national treatment, the investor must demonstrate that the host state has treated it less favorably than a domestic or foreign investor. As far as most-favorednation treatment is concerned, the investor must prove that the host state has treated him less favorably than an investor from another country.

Investment treaties contain, besides the standards of treatment, other international obligations for host states that may be of importance in taxation but are not usually characterized as standards of treatment. Above all, host states are under an international obligation not to expropriate investments without compensation. In addition, the treaties contain provisions ensuring the transfer and repatriation of funds.

Hence, it is necessary to analyze the WT in light of the aforementioned standards, as well as other international obligations included in investment treaties.

The Spanish WT may become the source of potential investment claims. Investment tribunals’ jurisdiction will also cover, in most instances, disputes related to the WT. This is the case because Spanish investment treaties seldom completely exclude tax matters from their purview. Secondly, the question would arise whether the WT is a “tax,” with the answer potentially having important consequences on the interpretation of carve-out clauses in an investment treaty.

It has become clear that expropriation claims based on the enactment of WT will not be successful. This is due to the fact that that tribunals take states’ taxation powers seriously, and only total or near total deprivation of an investment’s value could trigger an indirect expropriation claim. Also, the WT does not breach NT or MFN treatment.

Nevertheless, the WT may violate FET in two respects. Firstly, it can be argued that FET implies a certain stability in the Spanish legal framework. The WT may be viewed as a radical change in the Spanish regulation of taxes. As a result, investors may argue that this fundamental change in the Spanish tax system violates their legitimate expectations. While it is clear that an investment-friendly tax system may have been their decisive factor for investing in Spain, the obligation of regulatory stability stemming from FET must be invoked with caution. The reason for this is that most investment cases assessing the stability of the legal order relate to the energy sector, for which long-term stability is an absolute must. Contrary to this, it was defended that the stability requirement in the area of taxes is a “soft” one, leaving a wide margin open to the legislator.

Secondly, the requirement that banks do not shift the burden of the WT onto their clients under the sanction of penalty is prone to breaching FET. It will be extremely difficult for Spanish authorities to prove that banks increasing their fees represent particular instances of shifting the WT on to customers. Another question would be the proportion between the penalty and the breach of such duty imposed on banks. Although investment tribunals would show a degree of deference to administrative decision-making, it cannot be ruled out that the amount of the penalty may be reviewed for fairness and reasonableness by the investment tribunal.

Furthermore, for similar reasons, it might be argued that Spain has ceased to guarantee FPS to foreign investment in Spanish banks by enacting the WT. Nevertheless, given the nature of the FPS as an obligation of conduct, it is less likely that Spain would be found responsible for a breach of FPS by merely laying down the WT in Law 38/2022. However, it remains in question whether imposing a penalty for passing the adverse economic effects of the WT onto clients is in compliance with the “full” protection of investments.

In addition, Law 38/2022 may transgress the requirement of free transfer of funds under some Spanish investment treaties. Whether a breach of such a clause has arisen or not will depend on its wording and interpretation. If the clause guarantees free transfer after meeting tax duties, then an investor claim would not be successful. If not, however, it would be difficult for investment tribunals to read such a requirement into the free transfer clause, which does not expressly contain it.

In summary, the odds are in favor of Spain concerning potential investment claims stemming from the WT. However, certain aspects of the WT open avenues for foreign investors to bring their claims in investment tribunals.