Background
Ishares Europe ETF, a US collective investment undertaking treated as a regulated investment company, received dividends from Spanish companies during 2007–2010. Spain withheld tax at 15% under the Spain–United States double-taxation convention, while qualifying Spanish investment funds were subject to corporation tax at 1%. Ishares sought refunds of the difference.
After the Spanish tax authorities and Central Tax Tribunal rejected its claims, the National High Court granted Ishares a refund with interest. On appeal, Spain’s Supreme Court asked the CJEU whether any restriction on free movement of capital could be neutralised because Ishares could have elected to pay US tax itself and claim a credit, although it instead chose a tax-transparency regime under which it passed the dividends and related foreign-tax credit to its unit-holders.
The Court’s Holding
The CJEU held that Spain’s 15% taxation of dividends paid to the non-resident fund, compared with the 1% rate applicable to resident funds, constituted a restriction on the free movement of capital under Article 63 TFEU. Neither Ishares’ exemption from US tax under its transparency regime nor its transfer of the dividends and Spanish tax burden to its unit-holders altered the fact that Spain imposed the heavier burden. The referring court considered US and Spanish funds objectively comparable, subject to its ultimate assessment.
A bilateral tax convention may nevertheless neutralise the restriction when the fund transfers the dividends and corresponding tax credit to its unit-holders. That result is conditional on the unit-holders actually being able to use the convention to deduct, in full, the amount representing the difference between Spain’s tax treatment of non-resident and resident funds. The Spanish Supreme Court must determine whether the convention permits that full deduction and whether the unit-holders can actually obtain it; a merely theoretical credit available to Ishares itself does not neutralise the restriction.
Key Takeaways
- Spain’s 15% tax on dividends paid to the US fund, compared with the 1% rate for resident funds, was in principle a restriction on capital movement.
- Treaty relief neutralises unequal treatment only if it fully offsets the difference in tax burdens in practice.
- For a tax-transparent fund, relief obtained by its unit-holders may count, but the referring court must verify that they can actually claim the full deduction.
Why It Matters
The judgment confirms that treaty mechanisms can cure discriminatory source-state taxation even when relief operates at investor level rather than fund level. But the existence of an election or tax credit on paper is insufficient: the applicable convention must enable the investors actually to offset the full additional burden.
The ruling gives the Spanish Supreme Court the task of interpreting the Spain–United States convention and determining whether Ishares’ unit-holders satisfy that practical, full-offset requirement.