Introduction
On 17 September 2026, the Court of Justice of the European Union (First Chamber) delivered its judgment in case C-139/25, Administración General del Estado v Ishares Europe EFT. The case arose from a request for a preliminary ruling submitted by the Tribunal Supremo, the highest court in Spain, and concerns a question of fundamental importance in EU tax law: whether the taxation of dividends received by a non-resident investment fund at a rate that differs from that applied to a resident investment fund is compatible with Article 63 of the Treaty on the Functioning of the European Union (TFEU), which guarantees the free movement of capital.
The judgment addresses two interconnected legal issues. First, it examines whether the difference in treatment between resident and non-resident investment funds constitutes a restriction on the free movement of capital within the meaning of Article 63 TFEU. Second, it considers whether any such restriction can be neutralised by the application of a bilateral tax convention concluded for the avoidance of double taxation. These questions are of broad relevance to investment funds operating across EU member states and to national tax authorities seeking to apply domestic withholding tax rules to cross-border dividend payments.
Background and the reference for a preliminary ruling
The case was brought before the Court of Justice following a dispute between the Administración General del Estado, representing the Spanish tax authorities, and Ishares Europe EFT, a non-resident investment fund. The Tribunal Supremo, faced with questions concerning the compatibility of the applicable national tax rules with EU law, exercised its power under Article 267 TFEU to refer the matter to the Court of Justice for a preliminary ruling.
The core factual and legal context involves the tax rate applied to dividends received by investment funds. The referring court sought guidance on whether the rate applied to a non-resident fund differed from that applied to a comparable resident fund, and if so, whether that difference was capable of discouraging cross-border investment and thereby restricting the free movement of capital guaranteed by Article 63 TFEU.
The involvement of a bilateral tax convention for the avoidance of double taxation added a further layer of complexity. The question arose as to whether the convention, concluded between the relevant states, could operate to neutralise any restriction that might otherwise arise under EU primary law, a question that has significant implications for the interaction between international tax treaty obligations and EU internal market rules.
The legal framework: Article 63 TFEU and the free movement of capital
Article 63 TFEU prohibits all restrictions on the movement of capital between member states, as well as between member states and third countries. The Court of Justice has consistently interpreted this provision broadly, recognising that national tax measures which treat cross-border situations less favourably than purely domestic ones may constitute restrictions on the free movement of capital, even where they do not amount to outright prohibitions.
In the context of the taxation of dividends, the Court has previously recognised that a difference in the tax rate applied to dividends paid to non-resident recipients compared with those paid to resident recipients may deter non-resident investors from investing in a member state and may therefore constitute a restriction within the meaning of Article 63 TFEU. The judgment in case C-139/25 engages directly with this line of reasoning in the specific context of investment funds.
The case thus required the Court to assess whether the national rules at issue created a difference in treatment between resident and non-resident investment funds with respect to the taxation of dividends received, and whether that difference was capable of constituting a restriction on the free movement of capital as guaranteed by Article 63 TFEU.
The role of bilateral tax conventions in neutralising restrictions
A central and particularly significant aspect of the judgment concerns the question of whether a bilateral tax convention for the avoidance of double taxation can neutralise a restriction on the free movement of capital that would otherwise arise under Article 63 TFEU. This question touches on the relationship between EU primary law and international treaty obligations assumed by member states.
The Court of Justice has, in its case law, acknowledged that a restriction arising from a difference in tax treatment may, in certain circumstances, be neutralised by the application of a tax convention, provided that the convention effectively eliminates the less favourable treatment suffered by the non-resident. The judgment in case C-139/25 addresses this neutralisation argument in the context of the specific bilateral convention applicable to the dispute between the Administración General del Estado and Ishares Europe EFT.
The analysis of whether a convention can achieve such neutralisation requires a careful examination of the actual tax burden borne by the non-resident investment fund after the application of the convention's provisions, compared with the burden borne by a comparable resident fund. Only where the convention genuinely eliminates the disadvantage suffered by the non-resident can it be said to neutralise the restriction on the free movement of capital.
Significance for investment funds and national tax authorities
The judgment in case C-139/25 carries important implications for investment funds established in one member state that receive dividends from companies established in another member state. Where the member state of the paying company applies a higher withholding tax rate to dividends paid to non-resident funds than to those paid to resident funds, the compatibility of that difference with Article 63 TFEU will depend on the analysis set out by the Court.
For national tax authorities, the judgment underscores the need to assess carefully whether domestic withholding tax rules applicable to non-resident investment funds are consistent with the free movement of capital. Where a difference in treatment exists, authorities must consider whether it can be justified under EU law or neutralised by the terms of an applicable bilateral tax convention.
The preliminary ruling mechanism through which this case reached the Court of Justice illustrates the important role played by national courts, including supreme courts such as the Tribunal Supremo, in ensuring the uniform application of EU law across member states. By referring questions of EU law to the Court of Justice, national courts contribute to the coherent development of the internal market legal order.
Conclusion
The judgment of the Court of Justice of the European Union of 17 September 2026 in case C-139/25, Administración General del Estado v Ishares Europe EFT, addresses the compatibility with Article 63 TFEU of a difference in tax treatment between resident and non-resident investment funds with respect to dividends received, and examines the extent to which a bilateral tax convention for the avoidance of double taxation may neutralise any resulting restriction on the free movement of capital. The case, referred by the Tribunal Supremo, reflects the ongoing importance of EU primary law in shaping the tax treatment of cross-border investment fund activity within the European Union.
Practitioners, investment fund managers, and tax authorities operating in the EU should be attentive to the principles articulated in this judgment when assessing the compatibility of national withholding tax rules with EU law and when evaluating the effectiveness of bilateral tax conventions as a means of addressing potential restrictions on the free movement of capital.
This article is for educational and informational purposes only and does not constitute legal advice.
Sources consulted
Published by Synojus International
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