According to the Spanish National Appellate Court (Audiencia Nacional), Brazilian “juros” must be classified as dividends for the purposes of the double taxation agreement between Spain and Brazil. Therefore, since treaties prevail over domestic law, the treaty-based exemption for such income cannot be denied.
Brazilian tax law allows companies resident in Brazil to distribute to their shareholders part of their profits as juros sobre o capital próprio (JSCP). If certain requirements are met and within certain limits, this generates a tax-deductible expense in Brazil.
In Spain, the tax treatment of JSCP has been debated for years, both in relation to the application of the exemption provided in Article 21 of the consolidated text of the Corporate Income Tax Law (TRLIS) and, more recently, with respect to the exemption set out in Article 23.3 of the Double Taxation Agreement between Spain and Brazil (Spain-Brazil DTA).
While the TRLIS was in force, the Tax Agency took the view that JSCP were by nature interest under Brazilian tax law and therefore had to be treated as interest in Spain. However, the National Court (in several judgments) and the Supreme Court, in judgments of March 16 and December 15, 2016, held that one must look at the true legal nature of JSCP. After observing that they did not remunerate a loan, the courts concluded that JSCP should be characterized and treated as dividends or profit distributions, regardless of the fact that Brazilian law allowed them to be deductible. Moreover, the court emphasized that by applying the presumption established in Article 21 of the TRLIS and, given the existence of the Spain-Brazil DTA, it should be understood that profits distributed in the form of JSCP were subject to taxation in Brazil. The court added that if it were necessary to analyze the effective taxation of JSCP in Brazil, one should consider the overall tax burden of the Brazilian subsidiary.
What seemed to be a resolved controversy resurfaced when the new Corporate Income Tax Law (Law 27/2014 of November 27 – LIS) came into force, effective for fiscal years beginning in 2015. Article 21 of that law explicitly excludes the possibility of applying the exemption to profit participations whose distribution generates a tax-deductible expense.
After this change in legislation, the General Directorate of Taxes issued two binding rulings (V2960-16 and V2962-16) in which it classified JSCP as interest for the purposes of the Spain-Brazil DTA. This was because, although under Brazilian accounting rules JSCP are distributions of profits, Brazilian tax law equates them to returns on amounts provided as a loan. This conclusion was based mainly on two points: (i) Brazilian tax law allows the deductibility of the remuneration in determining the taxable base of the Brazilian tax, and (ii) the Brazilian withholding on JSCP paid to Spanish tax residents is 15% (the tax rate applicable to interest). In such cases, double taxation was to be eliminated by applying the 20% deduction provided for interest in Article 23.2 of the Spain-Brazil DTA (instead of applying the exemption provided for dividends in Article 23.3 of that DTA). This interpretation was confirmed by the Central Economic-Administrative Court (TEAC) in two decisions dated October 24, 2022 and November 24, 2022.
In view of this, it should be remembered that, as mentioned above, the Spain-Brazil DTA provides for the use of the exemption method for dividends that may be taxed in Brazil under the treaty. This rule has not been affected by any subsequent renegotiation of the treaty, nor by the entry into force of the OECD Multilateral Instrument (MLI), which Brazil has not signed.
In its recent judgment of May 22, 2025 (in an appeal handled by Garrigues), the National Appellate Court Court concluded that the Spain-Brazil DTA exemption cannot be denied to JSCP, since the treaty clearly classifies them as dividends (Article 10) and not as interest (Article 11). Furthermore, the court underlines that treaties take precedence over domestic laws, so the latter, as a general rule, cannot contradict the content and spirit of the former.
This ruling (still open to a possible appeal in cassation) is the first to resolve the second phase of a long-standing controversy regarding the tax treatment of JSCP in Spain. Beyond its direct and specific impact on the JSCP case, it is noteworthy for other situations, because it defines the limits of domestic legal changes that do not fit within the treaty text and are not accompanied by the corresponding (by definition, consensual and bilateral) modification of the treaty itself.
