CJEU Rules on Spanish Withholding Tax Treatment of US Funds

Overview

On 17 September 2026, the Court of Justice of the European Union (CJEU) issued judgment in Case C-139/25. The case resolves the Tribunal Supremo's preliminary reference on the Spanish withholding tax refund claim brought by iShares Europe ETF, a US Regulated Investment Company (RIC). At issue was whether the Spain-US double tax convention (DTC) neutralizes Spain's discriminatory tax treatment where the RIC passes its US tax credit to unit-holders.

The outcome is mixed. The Court confirms the restriction on free movement of capital and accepts comparability with Spanish funds, but stops short of the clean rejection of investor-level neutralization. Neutralization through unit-holders remains possible, subject to a fact-specific test the Tribunal Supremo must now apply on remand.

How the Case Reached the CJEU

1. iShares Europe ETF, a US RIC, received dividends from Spanish companies between 2007 and 2010, subject to a 15% withholding tax under Article 10(2)(b) of the Spain-US DTC.
2. Comparable Spanish resident funds were taxed at 1% under Article 28(5) of the Corporation Tax Law. iShares sought a refund of the 14-percentage-point differential.
3. The Spanish tax authority and the Tribunal Económico-Administrativo Central rejected the claim in 2017, disputing comparability and asserting neutralization.
4. The Audiencia Nacional ruled for iShares in 2022, finding the funds comparable, rejecting neutralization, and placing the burden of proof on the tax authority.
5. The State Attorney's Office appealed, and the Tribunal Supremo referred the neutralization question to the CJEU.

The Tribunal Supremo asked the CJEU whether such a restriction under Article 63 TFEU can be treated as neutralized where a non-resident fund, equivalent to a resident harmonized fund, could have elected under the applicable DTC and its home-country law to be taxed itself, and thereby deduct the excess Spanish tax in full, but instead chose to transfer its US tax credit to its unit-holders.

The Court's Reasoning

1. The Court confirmed that Spain's 15% withholding rate on non-resident funds, against 1% for resident funds, restricts the free movement of capital under Article 63(1) TFEU.
2. It rejected Spain's reliance on Finanzamt für Großbetriebe (C-602/23), which permits applying a resident regime to a transparent non-resident entity only where doing so does not increase the tax burden, unlike here.
3. Citing AllianzGI-Fonds AEVN (C-545/19), the Court held that taxing resident and non-resident funds on the same domestic-source income makes their situations objectively comparable, leaving final confirmation to the Tribunal Supremo.
4. On neutralization, the Court drew on Amurta, ACC Silicones and Miljoen. It restated that a bilateral tax convention neutralizes a restriction only if it ensures the full differential is deducted, in every case, from tax payable in the taxpayer's state of residence. Partial or theoretical relief does not qualify.
5. At the fund level, neutralization failed: iShares' pass-through election meant any deduction available to the RIC itself was purely theoretical.
6. Article 24(2)(a) of the Spain-US DTC allows US residents to credit against US tax not only tax paid personally, but also tax "paid on their behalf." On that basis, the Court held it "cannot be ruled out" that iShares' unit-holders may benefit from the Spanish tax credit directly.
7. This distinguishes the case from ACC Silicones (C-572/20), where the Court rejected shareholder-level offsetting outright: here, the DTC's specific wording arguably extends the credit to amounts paid on the taxpayer's behalf, a materially different mechanism.
8. The Court remanded the case, instructing the Tribunal Supremo to verify whether unit-holders can, in practice and not merely in principle, deduct the full 14-percentage-point differential from their own US tax liability.
   

The Operative Ruling

"Article 63 TFEU must be interpreted as meaning that a restriction on the free movement of capital may be considered to be neutralised by the application of a bilateral tax convention for the avoidance of double taxation … where that collective investment undertaking benefits, in its State of residence, from a tax transparency regime under which it is not taxed on the dividends received and transfers to its unit-holders those dividends and the tax credit corresponding to the withholding tax levied …, provided that those unit-holders can actually benefit from such an application, inasmuch as that application allows them to deduct in full from the tax payable by them in their State of residence the amount corresponding to the difference" between the two tax rates.

Implications for US RIC Claimants

1. This is not a clean win. The judgment stops short of the categorical rejection of investor-level neutralization.
2. The restriction and comparability findings remain favorable and are now confirmed at CJEU level, closing off reliance on Finanzamt für Großbetriebe (C-602/23) where the non-resident rate is higher.
3. The case returns to the Tribunal Supremo for a fact-specific test: whether unit-holders can actually and fully offset the 14-percentage-point differential under US tax rules. That decision will set the template for the wider Spanish RIC claim book.
4. Because the CJEU's standard requires full compensation in all cases, the composition of a RIC's unit-holder base — which often spans pension funds, IRAs, tax-exempt entities and non-US persons — is likely to become a central evidentiary issue on remand. Where holders cannot fully use a US foreign tax credit, this may support an argument that neutralization fails for some or all of the differential; however, the judgment does not allocate the burden of proving this either way, so the practical strength of that argument will depend on how the Tribunal Supremo resolves the evidentiary question.
5. Burden of proof was not addressed directly and is likely to be contested again before the Tribunal Supremo.
6. No refunds are unlocked by this judgment alone. Claimants should track the remand decision and gather unit-holder composition evidence now.

WTax's dedicated tax technical team will continue to monitor this case closely to ensure clients receive the most favorable tax treatment available under the ruling.