The Court of Justice of the European Union has ruled that a restriction on the free movement of capital could be neutralised by a bilateral tax convention for the avoidance of double taxation, provided the affected investment fund’s unit-holders could fully offset the additional tax burden.
The Court of Justice of the European Union (CJEU) issued the judgment on 17 September 2026 in Case C-139/25, concerning the taxation in Spain of dividends received by Ishares Europe ETF, a United States-based collective investment undertaking.
Ishares received dividends from shares in Spanish companies during the 2007 to 2010 tax years. Spain imposed tax on the income of non-residents through withholding at a rate of 15%, under Article 10(2)(b) of the DTC between Spain and the United States.
By contrast, resident Spanish collective investment undertakings were subject to corporation tax at a rate of 1% under Article 28(5) of the Law on Corporation Tax. Ishares sought refunds of the difference between the 15% withholding and the 1% rate applicable to resident funds.
The Spanish tax authorities rejected the claims, but the Audiencia Nacional subsequently ruled in Ishares’ favour. The case was then referred to the Tribunal Supremo, which asked the CJEU whether the difference in treatment could be considered neutralised through the DTC between Spain and the United States.
The CJEU held that the Spanish rules constituted a restriction on the free movement of capital under Article 63(1) TFEU because dividends paid to non-resident collective investment undertakings were subject to less favourable tax treatment than dividends paid to resident collective investment undertakings.
The Court noted that a bilateral tax convention for the avoidance of double taxation could neutralise such a restriction only if it fully compensated for the difference in tax treatment.
In this case, Ishares operated under a United States tax transparency regime. It was not itself taxed on the dividends and transferred the dividends and the tax credit corresponding to the Spanish withholding tax to its unit-holders.
The CJEU found that the possibility for Ishares itself to obtain a full deduction was only theoretical because it had elected the tax transparency regime and therefore did not pay United States tax on the dividends at entity level.
However, the Court said the DTC between Spain and the United States could potentially allow Ishares’ unit-holders to benefit from a deduction or tax credit for the Spanish withholding tax.
It therefore left it to the Tribunal Supremo to establish whether the unit-holders could actually use that mechanism and whether it enabled them to deduct in full the amount corresponding to the difference between the tax rates applicable to non-resident and resident collective investment undertakings.
The Court concluded that the restriction could be considered neutralised only where the unit-holders could actually benefit from the tax convention and fully offset the difference in tax treatment in their State of residence.
