The Spanish Supreme Court’s judgment of January 12 2026 could mark a significant – and controversial – milestone in the interaction between EU directives and double tax treaties (DTTs).
In its decision concerning royalty payments made by a Spanish subsidiary to a Dutch group company, the court held that where the exemption under the EU’s Interest and Royalties Directive (IRD) is denied because the recipient is not the beneficial owner (BO), the consequence is the direct application of Spanish domestic withholding tax rules, without the possibility of relying on the Spain–Netherlands DTT to limit source taxation.
Background and reasoning of the judgment
The case arose from an intra‑group royalty structure that had operated for many years. Historically, the Spanish operating company paid royalties directly to a Dutch sub‑holding under agency agreements in place until 2014, applying the 6% treaty rate without dispute (acting in a fiduciary capacity on behalf of the licensor, the Dutch entity was not deemed to be the BO, so the IRD was not considered). In 2014, a new set of licence and sub‑licence agreements was implemented, under which the Spanish entity became a sub-licensee of the Dutch company, which, in turn, licensed the intangibles from the Curaçao entity that legally owned the IP.
Following this contractual redesign, the Spanish taxpayer started to apply the exemption under the IRD, treating the Dutch entity as the BO of the income. The tax authorities disagreed, arguing that the Dutch company acted (even after the structure was modified) as a mere collection vehicle with limited functional capacity and that the royalties were, in substance, economically directed to the Curaçao entity. On this basis, they denied the IRD exemption.
The central legal question then became whether, once the directive exemption was denied, the taxpayer could still rely on the treaty’s reduced (6%) rate. It must be noted that, unlike many others, the Spain–Netherlands DTT does not contain the requirement of the recipient being the BO to benefit from the reduced rate.
In this context, the Supreme Court also rejected the application of the Spain–Netherlands DTT on the grounds that the payment fell within the personal and material scope of the IRD. In the court’s view, the directive fully governed the situation and, consequently, the treaty was displaced by virtue of the primacy of EU law. Accordingly, once the directive exemption was denied, the only applicable rule was the Spanish domestic withholding tax regime, with no possibility of resorting to the treaty as a fallback.
Why the court’s reasoning is flawed
The above conclusion assumes a normative conflict between the directive and the DTT, such that one must prevail over the other. Yet a conflict only arises when two rules impose incompatible commands, which is not the case here, since the IRD and DTTs are not only compatible but rather complementary.
The directive sets minimum standards for eliminating double taxation within the EU, requiring member states not to tax certain intra‑EU royalty and interest payments when specific conditions are met. The treaty, meanwhile, allocates taxing rights between Spain and the Netherlands and limits Spain’s ability to tax even outside the directive’s scope. Spain can therefore deny the directive exemption and still be required to respect the treaty’s limitations.
Nothing in the directive suggests that its inapplicability automatically precludes the operation of a DTT. In fact, Article 9 expressly provides the opposite, confirming that the directive does not affect the application of domestic or treaty provisions that go beyond its scope to eliminate or reduce double taxation. Member states therefore remain free to grant more extensive relief.
Finally, if the real concern were the existence of abusive conduct, the tax authorities had more direct tools at their disposal. Spanish law contains specific and general anti‑abuse provisions capable of addressing conduit structures without reshaping the interaction between treaties and directives. Invoking the primacy principle was therefore unnecessary and, in this context, conceptually misplaced.
Practical implications
A further area of concern is the potential impact of this judgment on interest payments. Under current Spanish domestic law, interest paid to EU lenders benefits from a withholding tax exemption without an express requirement that the recipient qualify as the BO, and recent case law has confirmed this interpretation.
However, were the Supreme Court to extend the reasoning adopted in this judgment, it could deny that exemption whenever an interest payment is considered to fall within the scope of the IRD, thereby triggering the application of the general domestic withholding tax rate and precluding recourse to treaty protection. Such an outcome would represent a significant departure from both the wording and the underlying rationale of the domestic provision, which preceded and is wider in scope and objectives than the IRD itself.
In addition, and although the judgment does not explicitly address it, the Supreme Court’s reasoning could be extendable beyond the IRD to other tax directives, most notably the Parent‑Subsidiary Directive. If that logic were applied to dividend distributions, Spain could deny treaty protection simply by asserting that the payment falls within the directive’s conceptual scope.
Moreover, this approach gives rise to a further paradox. Structures involving non‑EU jurisdictions may now be in a comparatively more favourable position where their applicable DTT contains no beneficial ownership requirement, which seems at odds with the very notion of EU integration and the avoidance of double taxation that the directives aim at.
