VELCRO case: with the Directive exemption refused for lack of beneficial ownership, the Spanish Supreme Court denies the treaty rate on the basis of EU-law primacy

The Spanish Supreme Court, in its judgment of 12 January 2026 (Contentious-Administrative Chamber, Second Section, judgment no. 7/2026, cassation appeal no. 6111/2023, Judge Rapporteur Isaac Merino Jara), known as the VELCRO case, resolves a question of importance for multinational groups paying royalties from Spain: once the exemption under Directive 2003/49/EC is refused because the recipient is not the beneficial owner of the royalties, the reduced rate under the bilateral tax treaty cannot be relied on either, and withholding tax applies at the general rate of the Non-Resident Income Tax Act (TRLIRNR). The ground is not a beneficial-ownership clause implicit in the treaty, but the primacy of EU law, which the Court applies “at least in this case”.

Some context is needed. Multinationals commonly structure royalty payments from an operating company in the source State —here, Spain— to a parent or intermediate company in another State. Where that company is resident in the European Union, the law offers two routes to reduce withholding tax.

The first is the exemption in article 14.1.m) TRLIRNR, which transposes Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. That exemption requires, among other things, that the recipient be the beneficial owner of the royalties. The second is the reduced withholding rate under the bilateral treaty; here, the 6% rate in article 12 of the Spain-Netherlands double tax treaty of 16 June 1971, whose text does not expressly refer to beneficial ownership.

The facts involve an intragroup royalty structure. The Spanish company VELCRO EUROPE, S.A. (VESA), which manufactured the group’s products, paid royalties for the use of intangibles to its Dutch parent, VELCRO HOLDING, B.V. The Dutch company in turn passed on the royalties received —practically in full— to another group company, VELCRO INDUSTRIES, B.V., resident in Curaçao.

The tax inspectorate adjusted the withholdings for 2012 to 2014 on the basis that VELCRO HOLDING, B.V. was not the beneficial owner of the royalties: it acted as a mere conduit, without economic control over the income, which it was bound to pass on to the Curaçao company. Accordingly, it applied neither the Directive exemption nor the 6% treaty rate, but the general TRLIRNR rate then in force of 24.75%. The High Court of Justice of Catalonia, in a judgment of 26 May 2023, upheld the adjustment.

The question of cassation interest was this: once the article 14.1.m) TRLIRNR exemption has been ruled out because the beneficial-ownership requirement is not met, does the reduced treaty rate apply or, on the contrary, the general TRLIRNR rate?

The Supreme Court opts for the general rate and dismisses the appeal.

To define the concept, the Court recalls that the beneficial owner is “the person entitled to appropriate the income with full powers; that is, without restrictions on its availability because, through contractual provisions or otherwise, it must be passed on to a third party”, and that an entity is the beneficial owner when it “enjoys the economic benefit of the royalties, with full powers to decide their use, and therefore without any obligation to transfer them to third parties”. The Court of Justice of the European Union addressed this notion, in relation to Directive 2003/49/EC, in the so-called Danish cases: the Grand Chamber judgment of 26 February 2019 in N Luxembourg 1 and Others (joined cases C-115/16, C-118/16, C-119/16 and C-299/16), which links the beneficial-ownership requirement to the general principle of EU law prohibiting abusive practices.

On the decisive question, the Supreme Court reasons as follows. The case is not outside the scope of Directive 2003/49/EC: it is governed by EU law through article 14.1.m) TRLIRNR, which faithfully reflects the Directive. That being so, “at least in this case”, the principle of primacy means that EU law displaces the bilateral treaty, so that, once the exemption is refused, the provisions of the Spain-Netherlands treaty do not apply and the rate laid down in domestic law does.

In our view, the outcome is reasonable in a case such as this, where the VESA → HOLDING → INDUSTRIES structure showed strong signs of formal channelling, without substance, to a territory outside the Union. The route taken to reach it is, however, open to debate. Giving EU law precedence over a bilateral treaty in order to deny a benefit that the treaty itself, on its wording, does not make conditional on beneficial ownership is an unusual use of primacy, and the Court itself expressly confines it to the case. For that reason, we do not think the judgment can simply be read as laying down a general rule for treaties that contain no beneficial-ownership clause.

One further observation is worth making. Applying the concept requires a rigorous analysis of the intermediate company’s economic substance. It is not enough to find that the recipient passes part of the income on to another group entity; what matters is whether, economically and legally, it has the powers to manage, decide on and benefit from the income received. In other cases —with intermediate companies that have employees, operational offices and autonomous business decision-making—, the outcome could be different.

For international groups with intermediate companies receiving Spanish-source income, the judgment counsels reviewing, structure by structure, the economic rationale of the interposed company —employees, operational offices, business decisions taken locally, effective governance— and the contemporaneous documentation showing that the formal recipient of the income actually has the powers of management and disposal that beneficial ownership requires. Nor should it be taken for granted that the treaty rate will act as a safety net if the Directive exemption is refused.

For defence purposes, the documentation to prepare and keep includes the intangible licence agreements between the group companies, board minutes of the intermediate company showing autonomous business decisions, budgets and annual accounts reflecting operations of its own and, generally, any evidence showing that the intermediate company is not a mere pass-through.

In short, the Supreme Court concludes that where the recipient is not the beneficial owner of the royalties and the Directive 2003/49/EC exemption is therefore refused, the reduced treaty rate cannot be applied either, because EU law displaces it by virtue of primacy; and it does so with an express caveat —“at least in this case”— which, in our view, limits the general reach of the doctrine.