In January 2026, the Spanish Supreme Court issued Judgment STS 20/2026 (ECLI:ES:TS:2026:20), resolving the case of Spain v. Velcro Europe S.A., a high-impact dispute involving international taxation, transfer pricing, and the application of benefits derived from European Union law. The decision reinforces an increasingly strict line of case law regarding the concept of beneficial owner and the requirement of real economic substance in intra-group structures linked to the exploitation of intangibles.
This ruling is particularly relevant for multinational groups that structure the payment of royalties for the transfer of trademarks, technology, or other intangible assets through intermediate entities located in European Union jurisdictions.
Background to the case
Velcro Europe S.A., an entity resident in Spain and engaged in manufacturing and marketing activities, made royalty payments for the use of certain intangible assets of the group to Velcro Holding B.V., a company resident in the Netherlands. These payments were made without withholding tax, under Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments between associated companies of different Member States.
The Spanish tax authorities questioned the application of the exemption, arguing that the Dutch company did not meet the condition of being the beneficial owner of the royalties, as it lacked sufficient economic substance and acted, in practice, as a mere conduit entity. According to the tax authority, the economic flows ended up being transferred to a group entity located in Curaçao, a jurisdiction that does not meet the requirements for accessing the benefits of the Directive.
After a series of previous administrative and judicial proceedings, the dispute reached the Supreme Court, which had to rule, among other things, on the correct interpretation of the concept of beneficial owner and the relationship between EU legislation and double taxation agreements.
Legal issues analyzed by the Supreme Court
The debate focused on three main issues:
- The interpretation of the concept of beneficial owner within the framework of the Interest and Royalties Directive.
- The requirement of real economic substance in entities receiving intra-group payments.
- The possibility of applying a double taxation agreement on a subsidiary basis when the exemption provided for in the EU Directive is denied.
The Supreme Court addressed these issues from a substantive perspective, giving priority to economic and functional analysis over the mere legal form of the transactions.
Beneficial owner and economic substance
One of the most relevant aspects of the ruling is the reaffirmation that the beneficial owner cannot be identified solely with the legal holder of the right to receive royalties. The Court held that, in order to qualify as a beneficial owner, the recipient entity must:
- Have control and real power of disposal over the income received.
- Assume significant economic risks associated with the exploitation of the intangibles.
- Perform relevant functions, beyond mere administrative or transitory management.
In this specific case, the analysis of the facts and evidence led the Court to conclude that Velcro Holding B.V. lacked sufficient material and human resources, did not make strategic decisions related to intangible assets, and did not effectively retain the economic benefits derived from the royalties, which were transferred to another entity in the group.
This approach is consistent with the doctrine of substance over form and with the case law of the Court of Justice of the European Union, particularly in Danish cases concerning abuse of Community directives, where it is emphasized that the application of tax benefits requires an underlying economic reality.
Relationship between the Interest and Royalties Directive and double taxation agreements
In its defense, Velcro Europe S.A. argued that, even if the exemption provided for in the Interest and Royalties Directive did not apply, at least the possibility of applying the Double Taxation Agreement between Spain and the Netherlands, which establishes a limitation on withholding tax on royalty payments, should be recognized.
The Supreme Court rejected this argument through a systematic and consistent interpretation of both regulatory instruments. First, it emphasized that the EU Directive and bilateral agreements respond to different legal logics, have their own assumptions, and pursue specific purposes, so there is no automatic relationship of subsidiarity between them. From this perspective, the denial of the EU exemption, when based on the absence of a beneficial owner, does not in itself open the door to the application of the bilateral treaty.
The Court also emphasized that the analysis of the beneficial owner is not limited to the scope of the Directive, but is also a relevant element in the interpretation and application of the double taxation agreement. Consequently, when it is concluded that the entity receiving the royalties does not have the status of true economic beneficiary of the payments, it is also not appropriate to recognize the treaty benefits. This approach reinforces a harmonious and consistent reading between European Union law and treaty law, avoiding results that, in practice, would allow one to achieve through one channel what has been legitimately denied through another.
Implications for transfer pricing
From a transfer pricing perspective, this ruling has significant implications. The Court did not limit itself to a formal analysis of the ownership of the intangibles, but examined the allocation of functions, assets, and risks (FAR analysis) within the group.
The decision reinforces the need for intra-group licensing structures to reflect an allocation consistent with value creation. In particular:
- Entities receiving royalties must demonstrate that they effectively contribute to the DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) of the intangibles.
- Contractual agreements must be supported by a verifiable operational reality.
- The transfer pricing policy must be consistent with economic substance and not solely with tax considerations.
The absence of these conditions exposes multinational groups not only to adjustments in withholding taxes, but also to broader questions about the correct remuneration of group entities.
Conclusions and strategic support
Ruling STS 20/2026 of the Spanish Supreme Court consolidates a particularly demanding standard in the application of tax benefits associated with intra-group royalty payments. The emphasis placed on economic substance, the effective role of intermediate entities, and the correct identification of the beneficial owner confirms an interpretation in line with the most recent developments in international tax law and with the transfer pricing principles promoted at the OECD level and by European case law.
For multinational groups, this ruling constitutes a clear warning: structures linked to the management and exploitation of intangibles must be solidly supported from a functional, economic, and documentary perspective. In a context of increasingly sophisticated taxation, consistency between the allocation of functions, assets, and risks and intra-group remuneration is no longer a good practice but has become a critical element of tax risk management.
In this scenario, having the support of a company specializing in transfer pricing is crucial. At TPC Group, we assist our clients in reviewing, designing, and defending their intragroup structures, ensuring that transfer pricing policies consistently reflect actual value creation and are properly aligned with current case law and regulatory criteria. Our approach combines in-depth technical analysis, comparative regulatory knowledge, and practical experience in handling complex tax disputes.
Source: TPCases