Spanish Supreme Court Clarifies Beneficial Ownership in Velcro Royalty Case

In January 2026, the Spanish Supreme Court issued an important decision in Spain v. Velcro Europe S.A. The ruling addresses the tax treatment of intra-group royalty payments and the interpretation of beneficial ownership under EU law. The case provides clear guidance on how Spain will assess intellectual property structures, particularly those relying on EU Directive benefits. It also signals increased scrutiny of arrangements that separate legal ownership of intangibles from the location of real economic activity.

Background

Velcro Europe S.A., a Spanish entity engaged in manufacturing and distribution, paid royalties to a related company resident in the Netherlands. These payments were made without withholding tax under the EU Interest and Royalties Directive, which eliminates withholding taxes on certain intra-EU payments between associated companies.

The Spanish tax authorities challenged this treatment. They argued that the Dutch company acted as an intermediary and did not qualify as the beneficial owner of the royalties. According to the authorities, the income was largely passed on to another group entity outside the European Union. As a result, they denied the Directive exemption and assessed withholding tax.

Key Legal Issue: Determining the Beneficial Owner

The Court examined whether the Dutch entity had sufficient substance to qualify as the beneficial owner. It stressed that legal entitlement alone is not enough. The analysis must reflect economic reality and functional activity.

To be considered the beneficial owner, an entity must:

• Exercise real control over the income.
• Assume actual economic risks.
• Perform functions linked to the management or exploitation of the IP.
• Retain the benefits rather than passing them through.

The Court concluded that the Dutch entity lacked personnel, decision-making capacity, and operational involvement. Its role was largely administrative. As a result, it could not benefit from the Directive.

Substance Over Form

The judgment confirms that substance prevails over contractual structure. The Court’s reasoning closely mirrors transfer pricing principles, particularly the expectation that returns from intangibles align with DEMPE functions and value creation.

No Automatic Treaty Protection

The taxpayer argued that treaty relief should apply if the Directive exemption was denied. The Court rejected this view, clarifying that EU Directives and tax treaties are separate regimes. Failure under one does not guarantee access to the other, especially where beneficial ownership is not established.

Transfer Pricing Implications

Although focused on withholding tax, the case has clear transfer pricing consequences:

• IP entities must demonstrate active management and control of intangible assets.
• Royalty arrangements must align with where functions and decisions occur.
• Documentation must support the allocation of risks and returns with real operational evidence.

The decision reflects a move toward evidence-based validation of group structures, not merely formal compliance.

Practical Impact for Multinational Groups

The ruling increases risk for structures involving:

• IP holding companies with limited substance.
• Conduit entities that receive and redistribute royalties.
• Misalignment between legal ownership and actual value creation.

Businesses operating in Spain should review their structures to ensure that legal arrangements match operational reality.

The Velcro decision reinforces a clear message: tax outcomes must follow economic substance. Access to Directive or treaty benefits now depends on demonstrating genuine ownership, control, and activity.

For tax professionals and investors, this case highlights the need to align transfer pricing policies, IP structures, and business operations in an increasingly substance-driven international tax environment.

Our advisory team assists multinational businesses with transfer pricing design, documentation, audit defense, and risk management.

Get in touch with our team to discuss how we can help you strengthen your transfer pricing position and manage tax risk in a rapidly changing global environment.

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