CJEU clarifies when treaty relief offsets dividend tax

Description of the facts

On 17 September 2026, the Court of Justice of the European Union issued its judgment in Case C-139/25, following a preliminary reference from the Spanish Supreme Court. The dispute concerned dividends received between 2007 and 2010 by iShares Europe ETF, a US regulated investment company (RIC), from Spanish companies. Spain levied 15% withholding tax under the Spain-US double tax treaty (DTT), whereas comparable Spanish collective investment undertakings were subject to tax at 1%.

A US RIC may elect a pass-through tax regime under which it distributes its investment income to investors rather than bearing the tax itself. In that case, foreign taxes attached to the distributed income, including Spanish withholding tax, may also be passed through as tax credits to eligible investors. The RIC therefore does not necessarily use the foreign tax credit at fund level; depending on the applicable US rules and the investors’ circumstances, the credit may instead be claimed by investors against their own tax liabilities.

Judgment

The CJEU held that the higher taxation of dividends paid to the US RIC, compared with dividends paid to comparable Spanish collective investment undertakings, constitutes a restriction on the free movement of capital. That restriction may nevertheless be neutralized where the Spain-US DTT, read together with the applicable US tax rules, enables the excess Spanish tax to be effectively and fully offset.

Neutralization may arise at fund level if the RIC is entitled to claim and use a tax credit for the Spanish withholding tax. Where the RIC operates under the pass-through regime and transfers the income and related foreign tax credit to its investors, neutralization may instead occur at investor level, provided the investors are entitled under the DTT and US rules to use that credit and obtain relief covering the full difference in treatment. A merely theoretical, formal or partial credit is insufficient. It is for the Spanish court to determine, in light of the evidence, whether the restriction was neutralized in practice at fund or investor level.

Key impact

Case C-139/25 should not alter the Spanish Supreme Court’s criteria for determining whether a foreign investment vehicle qualifies as open-ended. This criterion is currently used to determine whether a non-UCITS fund is entitled to a refund.. However, the Spanish Supreme Court should now examine in detail whether the discrimination may be neutralized where investors in a vehicle that has elected to operate under a pass-through tax regime can fully credit the Spanish withholding tax under an applicable double tax treaty. Notably, the US RIC in this case had already obtained treaty relief under the Spain-US DTT. It may therefore be difficult for the Spanish court to conclude that both the RIC and its investors can claim treaty benefits on the same income. Its forthcoming decision may also clarify who bears the burden of proving neutralization. Historically, the Spanish Supreme Court has placed this burden on the Spanish tax authorities, including through international mutual assistance mechanisms. This is particularly relevant because alleged neutralization and insufficient evidence of a vehicle’s open-ended nature remain two of the principal grounds used by the Spanish tax authorities to deny refund claims by foreign investment vehicles.

KPMG comments

In Spain, non-UCITS funds continue to face significant practical and evidential obstacles when pursuing withholding tax refund claims. In particular, they may be required to demonstrate that they are genuinely open-ended and comparable to Spanish collective investment undertakings, while the applicable criteria remain subject to dispute in pending and developing court cases. Treaty-based neutralization may also be difficult to establish where the fund has already benefited from the reduced withholding tax rate under the relevant DTT, since investors should not be able to obtain the same treaty advantage again in respect of the same income. These issues are especially acute for ETFs, for which the broad and frequently changing investor base makes it complex to identify the ultimate beneficial owners and to whether, and to what extent, those investors can claim or have actually obtained relief..