In a recent and controversial judgment, the Supreme Court affirms that when the Interest and Royalties Directive cannot be applied because the recipient of the royalties is not the “beneficial owner”, the withholding tax rate established in the Spanish domestic non-resident income tax regulations must be applied, rather than the reduced rate of the corresponding Tax Treaty for avoiding double taxation, given the primacy of EU law.
In his judgment of 12 January 2026, the Supreme Court analyses a case in which, after some structural changes, a Spanish company belonging to a multinational group paid certain royalties to an entity of the group which was tax resident in the Netherlands, which acted as a sub-licensee (and paid royalties) in respect of the intellectual property which ultimately belonged to a second entity also incorporated in the Netherlands but tax resident in Curaçao. The Tax Inspection challenged the exemption applied to the royalties paid by the Spanish entity on the understanding that the Dutch recipient was not its “beneficial owner”, as required by the Interest and Royalties Directive and also by the Spanish law that transposes this directive. Both the Tax Inspection and the successive instances (Regional Economic-Administrative Court and Hight Court of Catalonia) that confirmed the regularization rejected the application of the reduced tax rate provided for in the Tax Treaty for avoiding Double Taxation (DTT) between Spain and the Netherlands (6%).
Following the theses of the Inspectorate, the Regional Economic-Administrative Court and the High Court of Catalonia, the Supreme Court concludes that, by application of the principle of primacy of Union law, when it is within the scope of the Interest and Royalties Directive but the exemption is not applicable because the recipient is not the beneficial owner, it is not possible to go to the corresponding DTT to determine the applicable withholding rate (in this case, article 12 of the Spain-Netherlands DTT), but it is imperative to apply the domestic legislation. This conclusion is explained - again according to the Supreme Court - by the fact that this internal legislation fully transposes the Directive, which establishes a complete and priority regime for interest and royalty payments between associated companies of EU Member States, which excludes any other regulation (especially the DTT); therefore, the applicable withholding will be that provided for in the internal regulation (in the year analyzed, 24.75%) and not the 6% that operates as a tax limit according to the DTT (DTT which, by the way, does not include a beneficial ownership clause).
The conclusion of the Supreme Court seems, to say the least, debatable.
The judgment is based on the premise of a regulatory conflict between the Directive and the DTT, which then is resolved in accordance with the principle of normative hierarchy (the Directive takes preference). Otherwise (that is, if there were no conflict), it would be irrelevant whether one rule prevails over the other.
In a simple formulation, a normative conflict could be understood to occur when two or more norms (1) are applicable to the same case, (2) belong to the same legal system, and (3) their mandates are incompatible. In other words, the two rules cannot be complied with simultaneously (for example, when a DTT allows a tax - capital gains on the sale of real estate companies - that restricts the freedom of establishment, in that case either the DTT and the domestic rule apply, or the treaty applies, but never both). In the case analyzed, and even assuming that conditions (1) and (2) are met, it is difficult to assess the incompatibility of, on the one hand, the Interest and Royalties Directive and, on the other, the DTT between Spain and the Netherlands, since their objectives can be fulfilled simultaneously.
Thus, it is fair to say that Spain can (and should) refuse the exemption from the Directive if the recipient of the income is not its beneficial owner and, at the same time, must limit its taxing capacity in accordance with the distribution of taxing power resulting from the DTT. In fact, even when the exemption of the Directive is applied, the provisions of the DTT are being complied with (since Spain does not exceed the tax limit -6%- provided by the DTT). Therefore, there is no conflict between one provision and another.
This is because, in the field of avoidance of double taxation, the directives and the DTTs (or the domestic rules that pursue that objective) are not incompatible, but complementary. As is well known, directives are de minimis regulations whose purpose is to approximate laws, with the aim of harmonizing specific distortions arising from the interaction of different national tax laws. In this case, the Interest and Royalties Directive (like the Parent-Subsidiary Directive or the Merger Directive) obliges Member States to declare certain transactions exempt (if, of course, the requirements for this are met), but in no case does it prevent those same States from establishing a regime for the elimination of double taxation by domestic or conventional means, in the exercise of their powers, that goes beyond what is provided for in the Directive (as it has a broader or more ambitious subjective or material scope). There are countless cases in which this has been the case (the extension of the reorganization regime and the exemption from dividends to transactions and payments between Spanish companies or with third countries, the extension of this exemption from the parent-subsidiary Directive to the obtaining of capital gains, the inclusion within the neutrality regime of operations not included in the Directive) without anyone having considered that the Directive prevented or limited the exercise of said normative capacity. These legislative powers remain intact but have to be exercised in view of the tax sovereignty rules and limits stemming from the DTTs.
In fact, the de minimis nature of the Interest and Royalties Directive and its complementarity with other rules is explicitly clarified in its Article 9 when it states that “this Directive shall not affect the application of domestic or agreement-based provisions which go beyond the provisions of this Directive and are designed to eliminate or mitigate double taxation on interest and royalties”.
In other words, the Interest and Royalties Directive requires that no taxation be imposed when certain requirements are met, but it does not require taxation when these are not met. As the Union currently stands, the tax regulation of these payments falls within the competence of the Member States, which may exercise it freely and unilaterally or bilaterally, provided that they do not, of course, breach the Directive (i.e. not taxing interest and royalty payments required to be exempted by the Directive) or other provisions of Union law (e.g. restrict the fundamental freedoms of the Treaty).
Given that the above rules and principles (which are not cited in a very succinct judgment) are clear, and under the assumption that the Supreme Court does not intend to completely rule out the application of DTTs in royalty payments between European affiliates that do not meet the objective requirements of the Directive and, of course, in payments between unrelated parties, it could be inferred that what the court is concerned about for the “subsidiary” application (we insist that it is not) of the DTT, is that the recipient has the status of beneficial owner of the income. But this moves the debate to a different area, which the previous instances address but which the Supreme Court (even accepting it) avoids, as it is that in fact there has been no double taxation in the Netherlands and, therefore, it is not appropriate to apply the DTT. And here the debate - which has already gone on without further explanation from the compatibility of regulatory instruments to the fight against tax avoidance - is further confused by the invocation of the Danish cases, in which the CJEU analyzed an issue completely unrelated to the one raised in this appeal (namely, the limitations that the Directives establish -or not- to apply their own provisions). In those cases, no question arose concerning the principle of primacy or interaction between EU law and DTTs and, moreover, in any event, all the DTTs in the Danish cases included - unlike the Dutch case - the beneficial ownership requirement in the relevant articles.
This leads us to a well-known and discouraging terrain from the perspective of legal certainty: the application of an anti-abuse element or clause (or objective condition for the application of the Directive that becomes a condition for the application of the DTT, since all of this can be at the same time) does not need to be properly displayed in the Law and it must be understood to be already included in the wording of a DTT that does not include it (and that Spain and the Netherlands could have renegotiated a long time ago).
The jurisprudence established in the Stryker and Colgate cases is thus contradicted (superseded?), with an additional variant, which is that the implicit import of the beneficial owner clause does not come from the OECD Commentaries on the Model Convention or from the text of other subsequent DTTs, but from a Directive to eliminate double taxation that, moreover, does not apply (or is complied with in all its extremes, depending on how you look at it) in the present case.
This judgment also teaches us that, paradoxically (and through a kind of improper vertical downward direct effect that is projected onto rules outside this one), the application of an EU Directive to avoid double taxation places European related companies in a worse situation than unrelated companies and, of course, than to (related or not) residents in other third States when applying their DTTs. Multinational groups that have sub-licensee subsidiaries in countries such as Brazil, Canada or Switzerland (States whose DTTs with Spain do not contain a beneficial ownership clause in Article 12) should therefore be aware that (a) even without the consent of those countries, an EU Directive would have amended the DTT to include a beneficial ownership clause; or (b) that being a non-EU country may -surprisingly- benefit them, since they are not subject to the EU Directives to eliminate double taxation and are, therefore, entitled to still apply the relevant DTTs.
