VELCRO: no beneficial owner, neither the Directive exemption nor the reduced treaty rate

The Spanish Supreme Court, in judgment no. 7/2026 of 12/01/2026 (cassation appeal 6111/2023, known as the VELCRO case), upholds the adjustment of the withholdings on royalties that a Spanish subsidiary paid to its Dutch parent, which passed them on almost in full to another group company resident in Curaçao. Once the exemption of article 14.1.m) of the Consolidated Text of the Non-Resident Income Tax Act (TRLIRNR), which transposes Council Directive 2003/49/EC of 3 June 2003, had been ruled out because the recipient was not the beneficial owner of the royalties, the question was whether the reduced rate of the Spain-Netherlands tax treaty could apply. The Court answers in the negative: the case falls within the scope of the Directive and, at least in this case, the principle of primacy means that EU law displaces the bilateral treaty, so that the applicable withholding is the general TRLIRNR rate. In our view, the primacy-based solution is debatable and appears to be confined to the case. On the concept of beneficial owner, the reference point is the CJEU’s case law in the so-called Danish cases, in particular N Luxembourg 1 and Others (joined cases C-115/16, C-118/16, C-119/16 and C-299/16, judgment of 26/02/2019), concerning Directive 2003/49/EC, where the CJEU clarified the concept of beneficial owner and held that the general principle prohibiting abusive practices requires the Directive exemption to be refused in abusive arrangements, even in the absence of a specific national rule.

The practical consequence affects international groups that pay royalties from Spain to intermediate companies in other Member States: it is advisable to review the economic justification of each structure case by case, looking at the real substance of the recipient company (employees, operating offices, business decisions taken at its level). For defensive purposes, it is advisable to keep contemporaneous documentation (intangible licensing agreements, board minutes evidencing autonomous business decisions, budgets and annual accounts reflecting its own operations) capable of showing that the formal recipient does have the powers of management and disposal over the royalties received. Mere formal interposition of an intermediate company is not enough.

Full analysis in → The Spanish Supreme Court confirms in the VELCRO case the cross-cutting reach of the beneficial-owner concept in international taxation