Velcro Europe, S.A., a Spanish manufacturing company within the Velcro Group, paid royalties for the use of trademarks and technology. The intellectual property was legally owned by Velcro Industries B.V., which is based in Curaçao, while Velcro Holding B.V., which is based in the Netherlands, acted as the European licensing and collection entity. Velcro Europe paid royalties to the Dutch entity and applied for an exemption from Spanish withholding tax under the EU Interest and Royalties Directive, treating Velcro Holding BV as the beneficial owner of the income.
However, the tax authorities denied the exemption, arguing that Velcro Holding BV was merely an intermediary with limited substance and decision-making capacity, and not the beneficial owner of the royalties. According to the authorities, the royalties were economically destined for the Curaçao entity, meaning that the conditions of the EU Directive were not met. Consequently, the authorities applied the domestic withholding tax rate, without allowing recourse to the applicable tax treaty.
Velcro Europe challenged this decision, arguing that the Dutch company had a legal entitlement to the royalties and that it had sufficient economic substance and genuine functions related to IP licensing and management. The taxpayer further contended that, even if the exemption under the EU Directive were denied, withholding tax relief should still be available under the Spain-Netherlands tax treaty. After the claim was rejected by the High Court of Justice of Catalonia, the case was brought before the Supreme Court.
Judgment
The Supreme Court dismissed the appeal and upheld the assessment issued by the tax authorities.
The Court held that the EU Interest and Royalties Directive takes precedence over tax treaties, and that where the Directive’s exemption is denied due to a lack of beneficial ownership, treaty protection cannot be applied as a fallback. The Court confirmed that beneficial ownership requires real economic substance and autonomous decision-making, and that EU entities acting as mere conduits do not qualify.
In line with CJEU case law, particularly the Danish cases, the Court adopted a substance-over-form approach and concluded that the royalties were effectively attributable to the Curaçao entity. Consequently, Spain was entitled to levy withholding tax at the domestic rate under the Non-Resident Income Tax Act.
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