Article Summary 

• The CJEU has confirmed that Spain's 15% withholding tax on dividends received by a US RIC constituted a restriction on the free movement of capital, given that comparable Spanish investment funds were taxed at only 1%. 

• A merely theoretical possibility of tax relief does not neutralize that restriction. Spain could not rely on the fact that iShares could have elected a different US tax treatment allowing a fund-level foreign tax credit, because iShares did not make that election. 

• Neutralization may nevertheless be established at investor level where, as under the RIC's section 853 regime, the foreign tax is passed through to shareholders. The relevant question is whether those investors can actually obtain full relief under the Spain-US tax treaty. 

• The case now returns to the Spanish Tribunal Supremo, which must determine whether the treaty permits participant-level relief and whether iShares' participants actually received full relief for the 14-point tax difference. 

• The judgment has wider implications for cross-border investment structures: source states cannot rely on unused foreign tax options, and neutralization requires real and complete relief for the person who ultimately bears the tax. 

The case is particularly relevant for US regulated investment companies (RICs), but its significance is potentially broader. Residence-state exemptions, foreign tax credit limitations, elections and pass-through regimes are common features of cross-border investment structures. iShares Europe therefore addresses a more fundamental question about how far a Member State may rely on another jurisdiction's tax system when defending differential taxation under Article 63 TFEU. 

The dispute

Under the Spanish rules applicable to the years at issue, iShares was subject to Spanish non-resident income tax (IRNR) on those dividends at 15%, considering the Spain-US double tax treaty. Comparable Spanish investment funds were subject to Spanish corporation tax at a rate of 1%. 

iShares sought repayment of the difference. The claims concerned dividends received in 2007 to 2010. 

After the Spanish tax authorities rejected the claims, the Audiencia Nacional found in favor of iShares and ordered repayment with interest. The Spanish State appealed to the Tribunal Supremo, which referred the case to the CJEU by order of 11 February 2025. The reference was lodged with the Court on 17 February 2025. 

The dispute was not simply whether the Spanish rules resulted in different treatment, but rather whether that difference could nevertheless be regarded as neutralized by  tax treatment available to iShares under US law. 

The US RIC election and the question before the Court 

The unusual feature of iShares Europe is the US tax position of the fund. 

As described by the Tribunal Supremo, iShares could have been subject to US tax at RIC level in circumstances in which the Spanish tax could be credited against its US tax liability. According to the referring court, this could have enabled iShares to offset the Spanish tax in excess of the 1% burden borne by a comparable Spanish investment fund. 

iShares did not follow that route. Instead, it used the pass-through mechanism available to qualifying RICs under section 853 of the US Internal Revenue Code. 

Section 853 allows a RIC, subject to the applicable conditions, to pass foreign taxes through to its shareholders for US tax purposes. Where that election is made, the RIC does not simultaneously retain the foreign tax credit for the same taxes. Instead, shareholders are treated proportionately as having paid the relevant foreign taxes and may claim the corresponding foreign tax credit or deduction, subject to the normal US rules and limitations. 

In simplified terms, assume a RIC receives 100 of Spanish dividend income and Spain withholds 15. If the foreign tax is passed through under section 853, shareholders are treated for US tax purposes as having borne their respective share of the 15. The RIC itself cannot then also claim that same 15 as its own foreign tax credit. 

The case therefore did not concern a situation in which no mechanism existed in the United States for relieving the Spanish tax. Rather, according to the referring court, iShares had a choice as to where the relief could arise. It could have followed a route under which the Spanish tax was creditable at the fund level, but instead opted for the section 853 treatment, under which the foreign tax was attributed to shareholders. 

The preliminary question essentially asked whether the availability of the unused fund-level route was sufficient to neutralize the Spanish restriction. If not, the tax treatment of the shareholders potentially became relevant as a second level of neutralization. 

This is different from the more familiar situation in which a taxpayer is subject to residence-state tax, and a double tax treaty simply provides a credit for the source-state tax. 

The EU-law framework: Amurta, Santander and Fidelity 

Three earlier judgments provide the most useful framework for understanding the issue. 

Amurta: When can foreign tax relief neutralize a restriction? 

The starting point is Amurta (C-379/05). 

In Amurta, the Court accepted that a Member State may, in principle, comply with its free-movement obligations through a double tax convention. A disadvantage created by source-state legislation may therefore cease to constitute a restriction where the application of the convention neutralizes the difference in treatment. 

At the same time, Amurta draws an important distinction concerning the source of relief. A Member State cannot rely simply on a tax credit granted unilaterally by another state to escape its own obligations under the free movement of capital. Where neutralization follows from a double tax convention forming part of the applicable legal framework, however, that convention can be taken into account if it actually enables the effects of the restriction to be neutralized. 

That distinction is particularly relevant to iShares Europe. Spain's argument does not merely rely on the existence of foreign tax relief somewhere in the US tax system. It concerns the interaction between the Spain-US treaty and the tax treatment that iShares could have selected in the United States. 

But iShares Europe takes the issue one step further than Amurta. The question is not simply whether a treaty credit actually eliminates the source-state disadvantage. It is whether the source state can rely on a credit that would have been usable if the taxpayer had chosen a different residence-state tax position. 

The distinction is therefore between actual neutralization and the ability of the taxpayer to create the conditions for neutralization. 

Santander: at what level should the analysis take place? 

In Santander Asset Management (Joined Cases C-338/11 to C-347/11), France exempted domestic UCITS from tax on French dividends while non-resident UCITS suffered withholding tax. 

Because the domestic regime granted the advantage at fund level without making it dependent on the taxation of investors, the Court held that comparability had to be assessed at the level of the investment vehicle. The tax position of the investors was not relevant to that comparison. 

That principle matters in iShares Europe because the section 853 election moves the US foreign tax credit from the fund to its shareholders. If the Spanish preferential treatment for domestic investment funds is itself determined at fund level, Santander raises an obvious question as to why the tax position of iShares' investors should determine whether Spain has imposed a restriction on the fund. 

Fidelity: When does investor taxation matter, and who must adapt? 

Fidelity Funds (C-480/16) provides an important counterpoint and, in some respects, the closest analogy to the issue in iShares Europe. 

The Danish regime in Fidelity exempted resident investment funds from withholding tax where conditions relating to distributions and associated investor taxation were satisfied. Unlike the regime in Santander, the Danish system therefore made investor-level taxation part of the mechanism supporting the fund-level exemption. 

The Court accepted that this link was relevant to the coherence of the Danish tax system. But it nevertheless held that Denmark could not reserve the exemption to resident funds where the same objective could be achieved through a less restrictive mechanism. A non-resident fund capable of satisfying the relevant substantive requirements could not be excluded merely because it was not resident in Denmark. 

Santander and Fidelity therefore illustrate two sides of the same issue. If the source state's own regime grants relief at fund level without reference to investor taxation, the analysis should in principle remain at fund level. If investor taxation is an integral part of the domestic mechanism, it can legitimately become relevant, but any resulting restriction must still be necessary and proportionate. 

That distinction is particularly important in iShares Europe. Spain did not rely on an investor-level condition embedded in the Spanish investment-fund regime. It sought to attach significance to an election arising under US tax law. 

Fidelity also provides a useful perspective on who should be required to adapt. Spain's position can broadly be expressed as follows: iShares could have chosen a different US tax treatment and thereby created sufficient US tax liability to absorb the Spanish withholding tax. 

A Fidelity-type proportionality analysis approaches the issue from the opposite direction: why should the foreign fund have to reorganize its residence-state taxation in order to absorb a higher source-state tax burden that is not imposed on comparable domestic funds? 

The analogy should not be overstated. Fidelity was not a neutralization case in the Amurta sense and did not concern an unused foreign tax credit election. But it highlights an important issue of principle: whether the burden of adapting to a restrictive source-state regime can effectively be shifted to the non-resident taxpayer merely because another tax structure or election would have produced a different result. 

Read together, Amurta, Santander and Fidelity therefore frame the issue from three directions: when can residence-state relief neutralize a source-state restriction; at what level should that analysis take place; and how far may the source state require a foreign fund to adapt its own tax position in order to obtain equivalent treatment? 

None of the three directly answered the specific question presented in iShares Europe.

What if Spain subsequently refunds the tax? 

The section 853 mechanism creates a separate practical issue. If the Spanish withholding tax has already been passed through to investors for US foreign tax credit purposes, what happens if Spain subsequently refunds that tax following a successful EU-law reclaim? 

Suppose Spain initially withholds 15, that amount is passed through under section 853, and Spain later refunds 14. Without an adjustment, investors could potentially have received a US foreign tax credit based on 15 even though the definitive Spanish tax ultimately amounted to only 1. 

US tax law contains mechanisms intended to prevent that from becoming the final result. 

A subsequent refund of foreign tax can constitute a foreign tax redetermination under section 905(c). Applying the ordinary redetermination rules to a RIC can, however, be difficult. By the time a European withholding-tax reclaim is resolved, the shareholders who received the original section 853 pass-through may no longer hold the fund and may be difficult or impossible for the RIC to identify: this problem is specifically addressed by IRS Notice 2016-10. 

The background to the Notice is noteworthy in the context of iShares Europe. The IRS expressly referred to CJEU decisions requiring EU Member States to refund withholding taxes imposed on foreign investors where substantially similar domestic investors were not subject to equivalent taxation. The IRS noted that numerous RICs were consequently seeking, and some had already received, refunds of foreign withholding taxes. 

Subject to specified conditions, Notice 2016-10 permits a RIC to use a netting method, under which the refund is reflected in the foreign taxes passed through to shareholders in the refund year. This addresses the practical problem that the shareholders receiving the economic benefit of the refund may no longer be the shareholders who received the original foreign tax credit. 

Where the netting method is unavailable or inappropriate, the Notice also provides for a closing-agreement procedure that expressly contemplates the difficulties associated with former shareholders. 

A successful EU-law reclaim therefore does not necessarily result in investors permanently retaining a US foreign tax credit for Spanish tax that has ultimately been refunded. 

This is important context, but it is a downstream issue rather than the answer to the preliminary question. Notice 2016-10 determines the US consequences of a later reduction in Spanish tax. It does not determine whether Spain was entitled under Article 63 TFEU to retain the higher tax in the first place. 

Conceptually, the sequence is important: EU law determines the permissible Spanish tax burden; US law then determines the consequences of any resulting change in the definitive foreign tax. 

The Court's decision 

On 17 September 2026, the Court of Justice (First Chamber) delivered its judgment, answering the preliminary question with a conditional confirmation rather than an outright vindication of either party. 

The Court began by confirming that the Spanish rules did give rise to a restriction on the free movement of capital: dividends paid to iShares bore a 15% withholding tax under the Spain-US treaty, while dividends paid to comparable Spanish investment funds bore corporation tax at only 1%. That gap amounts to less favorable treatment of non-resident IICs, regardless of whether iShares itself bore any tax in the United States or passed the Spanish tax through to its participants. The Court also declined to apply its earlier ruling in Finanzamt für Großbetriebe (C-602/23), which had upheld application of a transparency-based regime to a non-resident entity only on condition that the dividends did not bear a heavier source-state burden than domestic dividends — a condition not met here. 

Turning to neutralization, the Court reaffirmed the Amurta principle that a bilateral tax treaty may in principle neutralize a source-state restriction, but only where its application actually, not theoretically, compensates the full amount of the differential in every case. On this basis, the Court rejected Spain's central argument: the fact that iShares could, in principle, have elected US corporate-level taxation and credited the Spanish withholding tax at fund level did not neutralize anything, because iShares never made that election and, having chosen the section 853 pass-through instead, could not in fact use it. An unused, purely theoretical possibility of relief is not neutralization. 

That did not end the analysis, however. Because iShares operated under a fiscal transparency regime, the Court held that the question of neutralization shifts to the level of its participants. It found that Article 24(2)(a) of the Spain-US treaty, which allows US residents to credit tax paid "by, or on behalf of" them, cannot be read as excluding participant-level relief for tax borne through a transparent RIC. Whether it actually does so, however, is a question of treaty interpretation the Court declined to resolve itself, consistent with its settled case law that interpreting a convention between a Member State and a third country falls outside Article 267 proceedings. 

The Court distinguished ACC Silicones (C-572/20), where it had refused to consider a beneficiary company's shareholders' ability to credit tax, on the basis that this case concerns a specific treaty-based neutralization mechanism operating through the fund's own transparency regime, not a national provision conditioning a refund on the absence of any possible imputation elsewhere. The Court did not need to engage with Fidelity directly, but its ultimate formula — full, effective relief guaranteed in every case — tracks the same underlying concern about placing an unwarranted burden of adaptation on the non-resident taxpayer. Santander was applied only at the threshold comparability stage, where the Court accepted, following the referring court's own assessment, that US RICs and Spanish IICs are objectively comparable. 

The Court accordingly held that the restriction can be neutralized by the treaty, provided iShares' participants can, in practice, deduct the full 14-point differential from the tax due in their state of residence — a factual and legal determination left to the Tribunal Supremo. 

Taxology's view: what does the decision mean for investors and WHT reclaims? 

For iShares itself, the judgment is not the final word. The claims for 2007-2010 now return to the Tribunal Supremo, which must determine two separate things: first, whether Article 24(2)(a) of the Spain-US treaty in fact extends the credit to RIC participants for tax borne on their behalf, and second, whether iShares' actual participants achieved full relief for the 14-point gap, not a partial or capped credit. Given ordinary US foreign tax credit limitation rules, that second question may prove the harder one in practice — a credit capped at each participant's US tax otherwise due on the relevant foreign-source income will not necessarily absorb the full Spanish differential for every participant, and the burden of establishing that outcome, across a diversified shareholder base years after the event, has not been allocated by this judgment. 

The decision does, however, settle an issue of real practical importance for the wider run of pending Spanish WHT reclaims brought by US RICs and other third-country funds using comparable pass-through elections: the mere theoretical availability of an alternative, unused residence-state tax position is not a defense. Tax authorities can no longer argue that a fund's failure to elect corporate-level taxation forfeits its claim. That should simplify a significant category of dispute, even as it opens a new one — the practical question of proving, or disproving, full participant-level relief. 

The reasoning is not confined to section 853. Any structure in which a source-state tax difference is defended by reference to a residence-state exemption, credit limitation, election or transparency regime should now be tested against the same two-step framework: is relief actual, not theoretical, and is it complete, not partial. That has implications well beyond the US-RIC context — comparable issues arise, for example, with other tax-transparent vehicles and jurisdictions offering elective look-through regimes. 

The judgment also confirms that tax authorities may legitimately request evidence of investor-level treatment where, as here, the fund's own regime routes relief through its participants. This is a meaningful departure from the Audiencia Nacional's approach, which had placed the burden of proving or disproving neutralization squarely on the tax authority via treaty exchange-of-information mechanisms, without requiring evidence from the fund about its own investors. The Tribunal Supremo will now need to determine how that evidentiary burden is allocated on remand, and the answer will likely shape practice in comparable disputes. 

On the Notice 2016-10 point, the judgment's approach is consistent with the sequencing set out above: EU law determines whether Spain was entitled to retain the higher tax, and only once that question is settled does the US redetermination machinery become relevant to unwinding any resulting refund. If the Tribunal Supremo ultimately orders repayment, the netting and closing-agreement mechanisms under Notice 2016-10 should address concerns about investors retaining a foreign tax credit calculated on tax that Spain has since refunded. 

More broadly, the judgment establishes that a source state cannot rely on another jurisdiction's tax system in the abstract — only on relief that materializes, in full, for the actual taxpayer bearing the economic burden. Where that taxpayer is not the fund but its investors, the analysis simply follows the money. 

The interaction with Notice 2016-10 should also be considered here if relevant to the Court's reasoning. In particular, if the judgment results in Spanish refunds for US RICs that previously passed the Spanish tax through to shareholders, the existence of the US redetermination mechanisms will be relevant to assessing any perceived risk of double relief. 

Conclusion 

iShares Europe sits at the intersection of two tax systems and a fundamental question under the free movement of capital. 

The Spanish tax difference itself was straightforward. The complexity arose because the US RIC regime gave the fund a choice affecting where the benefit of the foreign tax credit could arise. 

The resulting question goes beyond US RICs: when assessing a restriction imposed by the source state, should Article 63 look at the non-resident taxpayer's actual tax position, or may the source state also rely on a different residence-state tax position that the taxpayer could have elected? 

The answer matters wherever institutional investment structures combine source-state withholding taxes with residence-state exemptions, foreign tax credits, elections or pass-through regimes. It ultimately concerns how far one jurisdiction may rely on another jurisdiction's tax system to justify unequal taxation under its own laws. 

Whether iShares ultimately recovers the disputed withholding tax will now depend on how the Tribunal Supremo reads Article 24(2)(a) of the Spain-US treaty and what the evidence shows about its participants' actual US tax position — questions the CJEU has left open. But the judgment leaves no doubt about the applicable test: neutralization requires real, complete relief for the person who actually bears the tax, and a source state cannot rely on the mere existence of a foreign election it knows the taxpayer never used.