The Court of Justice of the European Union (CJEU) issued a judgment on 17 September 2026 in Case C-139/25 concerning the taxation of dividend income received by a foreign investment fund. The focus was on Art. 63 AEUV (TFEU, Treaty on the Functioning of the European Union) and thus on the free movement of capital between Member States and between Member States and third countries. The judgment is cited as ECLI:EU:C:2026:763.
The proceedings concern the question of the circumstances in which unequal tax treatment between undertakings for collective investment resident in Spain and non-resident undertakings for collective investment can be offset by a double taxation agreement. The Court made clear that a merely theoretical possibility of crediting is not sufficient. Rather, the relevant difference in tax burden must actually and fully be neutralised.
Background to the proceedings before the CJEU
Dispute over withholding tax on Spanish dividends
The proceedings arose from a legal dispute between the Administración General del Estado and Ishares Europe ETF. The fund is an undertaking for collective investment domiciled in the United States and, according to the information provided by the referring court, meets the requirements of a regulated investment company under the Investment Company Act of 1940. The fund concerned belongs to the iShares ETF brand of the asset manager BlackRock.
In the tax years 2007 to 2010, the fund received dividend income from holdings in Spanish companies. Spain levied non-resident income tax on this by way of withholding tax deduction. On the basis of the double taxation agreement between Spain and the United States, a tax rate of 15% was applied.
By contrast, under Spanish law, comparable undertakings for collective investment resident in Spain were taxed on their dividend income at a rate of 1%. The dispute therefore concerned a difference of 14 percentage points. The fund applied for a refund of this differential amount.
Procedural history in Spain
The Spanish tax administration rejected the refund applications. The Tribunal Económico-Administrativo Central (Central Economic-Administrative Tribunal) also dismissed the appeal lodged against this by decision of 5 October 2017. The reasoning included, among other things, that the fund’s situation was not objectively comparable with that of Spanish undertakings for collective investment and that any restriction on the free movement of capital had in any event been neutralised.
The Audiencia Nacional (National High Court of Spain) ruled in favour of the fund by judgment of 12 September 2022. It recognised a claim for reimbursement of the amounts applied for, plus interest from the time of the withholding tax deduction. According to supplementary information from the context of the proceedings, this corresponded to a refund claim amounting to 14% of the dividends paid from Spain.
The tax administration lodged an appeal on points of law against this judgment with the Tribunal Supremo (Supreme Court of Spain). The cassation proceedings are conducted under case number recurso de casación 8746/2022; the order granting leave to appeal dates from June 2023. The Tribunal Supremo stayed the proceedings and requested that the CJEU interpret Art. 63 AEUV (TFEU, Treaty on the Functioning of the European Union).
Legal framework of the decision
Art. 63 AEUV and Art. 65 AEUV
Art. 63(1) AEUV prohibits restrictions on the movement of capital between Member States and between Member States and third countries. Its scope of protection therefore also covers capital movements between Spain and the United States. Art. 65 AEUV does allow Member States to apply tax provisions that treat taxpayers differently according to their place of residence or the place where their capital is invested.
However, this power is limited. Under Art. 65(3) AEUV, such measures must not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments. The Court therefore focuses on the question of whether the situations concerned are objectively comparable or whether unequal treatment can be justified by overriding reasons in the public interest.
Spanish taxation of resident and non-resident funds
Under the Spanish rules relevant in the main proceedings, dividends distributed to resident undertakings for collective investment were subject to corporate income tax at a rate of 1%. By contrast, dividends paid to the fund resident in the United States were taxed at 15%. The higher rate resulted from the double taxation agreement between Spain and the United States.
The CJEU emphasised that less favourable tax treatment of non-resident undertakings for collective investment is capable of deterring them from investing in the source state. Such treatment may therefore constitute a restriction on the free movement of capital. According to the decision, the fact that the fund was subject to a special tax regime in its state of origin or was not taxed there on the dividends did not alter this.
Comparability of resident and non-resident undertakings for collective investment
The Court’s standard
According to CJEU case-law, the comparability of a cross-border situation with a domestic situation depends on the objective, purpose and content of the national provision concerned. In addition, only the distinguishing criteria established by that provision itself are to be taken into account. In the area of dividend taxation, it is particularly relevant whether the source state exercises its taxing power vis-à-vis non-resident recipients.
The Court points out that the situation of non-resident undertakings for collective investment becomes closer to that of resident undertakings as soon as a Member State taxes not only resident recipients but also non-resident recipients with regard to income from domestic companies. In the present case, the Audiencia Nacional had already accepted the comparability of US regulated investment companies with Spanish undertakings for collective investment.
Restriction due to higher withholding tax
The CJEU concluded that the Spanish rules in principle constitute a restriction on the free movement of capital prohibited by Art. 63(1) AEUV. The decisive factor was that dividends distributed to the non-resident fund were taxed at 15%, while dividends distributed to resident undertakings for collective investment in Spain were subject to a tax rate of only 1%.
The Court was not persuaded in this respect by the Spanish Government’s argument that the fund itself was not subject to corporate income tax on this dividend income in the United States and passed the income on to its unit holders. What was decisive was that Spain, by exercising its own taxing power, imposed a higher burden on the dividends of the non-resident fund.
Neutralisation by double taxation agreement
Full offset is required
The core of the decision concerns the question of when a double taxation agreement can offset a restriction on the free movement of capital. According to CJEU case-law, such an agreement can neutralise unequal treatment if its application fully eliminates the effects of the different treatment. To this end, the tax levied in the source state must be capable of being credited in the state of residence to the extent to which the national rules create a disadvantage.
The Court thus requires a full deduction of the amount corresponding to the difference between the tax rates for resident and non-resident undertakings for collective investment. In the specific case, this concerned the difference between 15% withholding tax and the 1% taxation of comparable Spanish undertakings for collective investment. A merely theoretical possibility of crediting is not sufficient.
Significance of the US transparency regime
The fund had elected a tax transparency regime in the United States. According to the information provided by the Tribunal Supremo, this regime meant that the dividend income was not taxed at the level of the fund itself but could be attributed to the unit holders. At the same time, the fund could pass on the foreign tax credit to its unit holders.
Because the fund itself was not taxed in the United States on these dividends, it could not use a credit at its own level. The CJEU described such a deduction option for the fund in these circumstances as purely theoretical. It could therefore not be sufficient merely to rely on the fact that the double taxation agreement provided for a credit mechanism in the abstract.
Inclusion of unit holders
Possible credit at unit-holder level
The Court did not rule out that the double taxation agreement between Spain and the United States could be interpreted to mean that the fund’s unit holders can use the Spanish withholding tax or a corresponding tax credit. Art. 24(2)(a) of the agreement provides that the United States allows its residents or citizens, under certain conditions, a deduction not only of income tax paid by themselves but also of income tax paid in Spain on their behalf.
The CJEU did not make a final assessment of whether this possibility exists in the specific case. The interpretation of the double taxation agreement and the determination of the actual crediting possibilities are matters for the referring court. However, the CJEU set out the EU-law standard for this purpose.
Requirements for neutralisation in the case of transparent taxation
According to the judgment, neutralisation can only be assumed if the unit holders actually benefit from the relevant application of the agreement. In addition, that application must allow them to fully deduct the amount corresponding to the difference between the withholding tax rate for non-resident undertakings for collective investment and the tax rate for resident undertakings for collective investment.
The Court thus differentiates between an abstract possibility of crediting and relief that is actually effective. The decisive question is not merely whether an agreement provides for a mechanism. What matters is whether, in the specific tax context, that mechanism fully eliminates the disadvantage.
Operative part of the CJEU decision
The CJEU held that Art. 63 AEUV must be interpreted as meaning that a restriction on the free movement of capital may be neutralised by a bilateral double taxation agreement where an undertaking for collective investment is subject to a transparency regime in its state of establishment. The prerequisite is that the undertaking is not taxed on the dividend income and transfers the dividends and the tax credit corresponding to the withholding tax in the source state to its unit holders.
However, such neutralisation requires that the unit holders actually benefit from this application of the agreement. In their state of residence, they must be permitted to fully deduct the amount corresponding to the difference between the tax rate applied to dividends paid to non-resident undertakings for collective investment and the tax rate applied to dividends paid to resident undertakings for collective investment.
Practical classification of the decision
No automatic refund as a result of the judgment
The judgment clarifies the standard of review under EU law, but it does not automatically lead to a refund of withholding tax retained. Following the CJEU decision, the Tribunal Supremo must now give a final decision on the appeal on points of law in the main proceedings. In doing so, it will in particular have to examine whether the fund’s unit holders were in fact able to use a full credit or a corresponding deduction.
According to calculations from the context of the proceedings, the fund bore approximately EUR 10 million in additional tax per assessment period. Given a four-year application period, a possible volume of up to approximately EUR 40 million was mentioned. This information relates to the specific procedural context and is not a substitute for an assessment of the individual case.
Relevance for cross-border fund structures
The decision is particularly significant for situations in which funds resident outside the EU and EEA receive dividends from Spanish companies. The discussion mentions, among others, funds domiciled in the United States, Switzerland or Canada. The judgment is also being relied on as a basis for argument in connection with refund applications by non-resident investors against Italian withholding tax.
For companies, investors and high-net-worth individuals, the precise distinction drawn by the Court is particularly important:
- A higher withholding tax on dividends paid to non-resident funds may constitute a restriction on the free movement of capital.
- A double taxation agreement can neutralise this restriction only if there is full and actual relief.
- A merely theoretical possibility of crediting is not sufficient.
- In the case of transparent funds, the actual relief at the level of the unit holders may become decisive.
- The final application to the specific facts remains a matter for the national court.
Frequently asked questions
CJEU C-139/25 Spain US fund withholding tax 15 percent versus 1 percent: what was decided?
The CJEU held that the higher taxation of dividends paid to a non-resident undertaking for collective investment may, in principle, constitute a restriction on the free movement of capital. Neutralisation by the double taxation agreement can be considered only if the differential amount is actually and fully offset.
Art. 63 AEUV investment funds dividends Spain: when does a double taxation agreement neutralise unequal treatment?
According to the CJEU, a treaty mechanism is sufficient only if it enables a full credit or full deduction of the amount corresponding to the tax difference between resident and non-resident funds. A purely theoretical possibility of crediting is not sufficient.
CJEU judgment C-139/25: practical consequences for foreign funds with Spanish dividends?
The judgment does not trigger an automatic refund, but it may be significant for the assessment of cross-border withholding tax burdens. According to the CJEU, it must be examined in the specific case whether the additional tax burden was actually and fully neutralised.
Tax law advice on cross-border investment income
The CJEU’s decision illustrates that the tax treatment of cross-border dividend flows requires a precise analysis of national tax law, the applicable double taxation agreement and the actual crediting possibilities. MTR Legal Rechtsanwälte advises companies, investors and high-net-worth individuals on tax law issues with an international dimension. For legal questions on the taxation of investment funds, withholding tax and cross-border investment income, you can find further information at Legal advice in tax law.
