CJEU sets limits on the taxation of non-resident investment funds

A difference in tax rates that raises the possibility of unequal treatment

In its judgment of 17 September 2026 (Case C-139/25), the Court of Justice of the European Union (CJEU) ruled on the Spanish taxation of dividends received by a US collective investment undertaking (CIU) and its compatibility with the free movement of capital. The issue examined was whether a non-resident fund can be subject to higher taxation in Spain than a Spanish fund when both are in comparable situations.

The dispute concerned a CIU established in the United States that had received dividends from Spanish companies between 2007 and 2010. These dividends were subject to a 15% withholding tax in Spain under the treaty for the avoidance of double taxation between Spain and the United States. By contrast, Spanish investment funds that met the requirements laid down by domestic legislation were subject to a 1% corporate income tax rate. In other words, while the US CIU was subject to a 15% withholding tax on those dividends, comparable Spanish funds were taxed at 1%.

The CJEU considers that this difference in taxation constitutes, in principle, a restriction on the free movement of capital provided for in Article 63 of the Treaty on the Functioning of the European Union. The starting point is therefore that the US CIU bore a higher tax burden than resident CIUs in situations considered objectively comparable by the referring court.

The central question, however, was whether this difference could be neutralised by the treaty between Spain and the United States. The US CIU operated under a tax transparency regime and passed on to its investors both the dividends and the tax credit corresponding to the Spanish withholding tax. The key issue was whether that tax credit actually made it possible to offset the difference in taxation borne in Spain.

The CJEU establishes a clear criterion: for a double taxation treaty to neutralise a difference in treatment that is contrary to the free movement of capital, it must allow that difference to be fully offset. It is therefore not sufficient for there to be, in theory, the possibility of applying a deduction: that deduction must be effective.

In the case examined, the CIU had opted to pass the tax credit on to its investors and was therefore unable to benefit from the deduction itself. According to the Court, the mere existence of a deduction provided for in the treaty is not sufficient if, in practice, it does not allow the higher taxation borne in Spain to be offset. Nor can the CIU be required to give up the tax regime it has legitimately chosen in its State of residence in order to obtain that protection.

The CJEU concludes that the restriction can only be considered neutralised if the investors can effectively benefit from the mechanism provided for in the treaty and fully offset the difference in taxation. It is for the Spanish Supreme Court to determine whether the Spain-US treaty actually allows such compensation to be achieved..