For the purposes of the Spanish-Brazilian double tax treaty, Juros will now be characterized as interest, and eligible for tax-sparing credit instead of full exemption.
Following two new binding rulings , Brazilian interest on net equity payments or Juros ("juros sobre o capital própio or JsCP") will be treated as "interest" for the Spanish-Brazilian Tax Treaty (the "Treaty"), despite their treatment as dividends under Spanish domestic law. Accordingly, income arising from JsCP would be able to benefit from the 20 percent tax-sparing credit available to interest under the Treaty, instead of the exemption for dividends. Under previous decisions of the Spanish National Court, income from JsCP was considered as dividends for both domestic and Treaty purposes.
The treatment of dividends and interest under the provisions of the Treaty is considerably different: income received by a Spanish resident regarded as dividends under the Treaty would be fully exempt in Spain, whereas for income characterized as interest for Treaty purposes, according to article 23.2 of the Treaty, a tax-sparing credit of 20 percent would apply.
As stated in both rulings, the SGDT considers that JsCP income does not fall under the specific definitions of interest and dividends in the Treaty. Therefore, the characterization should be determined according to the domestic tax legislation of the country at source (i.e. Brazil).
In this respect, the SGDT confirms that even if the Brazilian domestic accounting rules treat the JsCP income as a dividend, from a purely Brazilian tax perspective such income should be treated as interest as long as:
- it is subject to the 15 percent withholding tax in Brazil applicable to interest payments, and
- it can be considered as a tax-deductible expense when determining the Brazilian taxable amount.
Following the above reasoning, the SGDT concluded that JsCP income should be treated as interest for Treaty purposes regardless of its characterization under Spanish domestic law or the previous decisions of the Spanish High Court when it was confirmed that it was similar to dividends in Spain for tax purposes, both under the Treaty and domestic law. Accordingly, this income will now be able to benefit from the 20 percent tax-sparing credit available to interest under the Treaty, but not completely eliminating double taxation, as the Spanish Corporate Income Tax rate is 25 percent.
However, both rulings confirm that, further to the previous decision of the Spanish Supreme Court, JsCP income must be treated as dividends for Spanish domestic law purposes, without the possibility of benefiting from the recently amended Spanish participation exemption. In this respect , it is worth noting that from tax periods starting on or after 1 January 2015, the participation regime is expressly excluded where the dividends or participations received are tax deductible at the level of the distributing entity.
This characterization by the SGDT of the JsCP as a debt instrument for Treaty purposes could be controversial considering that it differs from the treatment specified by the Spanish National Court. Therefore, we will have to wait for new judgments of the Spanish Supreme Court regarding this issue. In the meantime the issue should be analyzed on a case by case basis in order to determine the method of double tax relief under the Treaty.