On May 28, 2025 on the website of the Dutch Courts 3 judgments of the Court of Appeal of The Hague on the relevance of the outcome of a Mutual Agreement Procedure for earlier years. The judgments regard the question whether for the financial years 2018 through 2020 under the Dutch-Brazilian DTA the tax sparing credit of Article 23, Paragraph 4, section a (a tax sparing credit of 25% applying to dividends as meant in Paragraph 2 of Article 10 of the Convention) or the tax sparing credit of Article 23, Paragraph 4, section b (a tax sparing credit of 20% applying to interest as meant in paragraph 2 of Article 11) applies to income that qualifies as juros sobre o capital próprio (Hereinafter: JCP) under Brazilian law? A JCP in the English Language is referred to as “Interest on Net Equity” (Hereinafter: IoNE) or as an “Allowance for corporate equity”.
For answering the aforementioned question, the Court of Appeal of The Hague first analyzes whether the income qualifies as a dividend or as interest at the level of the Dutch taxpayers. Secondly the Court answers the question whether the outcome of a MAP-procedure, in which in 2022 the Dutch and Brazilian authorities came to an agreement on the tax treatment of income that qualifies as JCP under Brazilian law, has relevance for earlier years.
The facts, the dispute and the questions referred for a preliminary ruling
Since it regards judgments in similar cases, below we will describe the facts of one of the 3 cases. In this case the facts of Case ECLI:NL:GHDHA:2025:859. We decided to take Case ECLI:NL:GHDHA:2025:859 because in that case the application of the tax sparing credit of Article 23, Paragraph 4, section a of the Dutch-Brazilian DTA is disputed for the financial years 2019 and 2020. The facts of the other 2 cases (Case ECLI:NL:GHDHA:2025:858 & Case ECLI:NL:GHDHA:2025:860) can be found via the links at the end of this article, which will forward you to the Dutch text of the judgments as published on the website of the Dutch courts.
2.1. In 2019 and 2020, the taxpayer holds all the shares in [A Ltda] (the participation). The participation is established in Brazil.
2.2. In 2019 and 2020, the taxpayer received income from the participation; in 2019 a gross income of €3,077,562 and in 2020 a gross income of €2,042,470. Under Brazilian law, this income qualifies as “JCP”.
2.3. In its 2019 and 2020 Dutch corporate income tax returns the taxpayer, claimed an amount of withholding tax to be credited with respect to the received IoNE of €769,391 (25% of €3,077,562) for 2019, and €477,558 (25% of €2,042,470) for 2020. The taxpayer thus applied the exemption percentage (the so-called tax sparing credit) that applies under Article 23, paragraph 4, subparagraph a, of the Dutch-Brazilian DTA to dividends as referred to in Article 10 of said DTA. Taking into account this tax sparing credit, the taxpayer claimed a total deduction for foreign tax paid of €918,977 for 2019 and €713,455 for 2020.
2.4. When imposing the assessments, the tax inspector adjusted the tax sparing credit taken into account by €150,341 to €768,636 (2019), and by €69,064 to €644,391 (2020). The Inspector thus considered the 20% tax sparing credit applicable, as provided for under Article 23, paragraph 4, letter b, of the DTA, which applies to interest received as referred to in Article 11 of the DTA.
2.5. On 27 August 2020, the Decree on the Qualification of Brazilian Interest on Net Equity was published in the Dutch State Gazette. This Decree includes, among others, the following:
"1. Introduction
In practice, uncertainty exists regarding the classification of the Brazilian 'Juros sobre o capital próprio' (referred to in English as 'Interest on net equity' or 'Allowance for corporate equity') for the application of the Convention between the Kingdom of the Netherlands and the Federative Republic of Brazil for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter: 'the Tax Treaty'). This classification is important with respect to the amount of tax sparing credit that may be granted by the Netherlands under the Tax Treaty. This decree provides clarification on how this 'Interest on net equity' should be interpreted for the purposes of the Tax Treaty."
1.1 Definitions and Abbreviations Used
IoNE – Interest on Net Equity
TSC – Tax Sparing Credit
DCIT – Dutch Corporate Income Tax Act
2 Qualification of IoNE
In Brazil, it is possible to pay shareholders an IoNE (Interest on Net Equity) in addition to regular dividends. This is a remuneration based on the amount of (net) equity. Under Brazilian civil law, this remuneration is considered equivalent to a dividend. However, for Brazilian tax purposes, it is treated as interest. The payment is deductible for the paying company and taxable at the level of the shareholder.
For Dutch tax purposes, the IoNE is considered a benefit derived from the ownership of shares. In cases where this concerns a shareholding that qualifies for the participation exemption, the participation exemption under Article 13 of the Dutch Corporate Income Tax Act (DCIT) applied to this income up to January 1, 2016. However, as of January 1, 2016, Article 13, Paragraph 17 of the Dutch Corporate Income Tax Act was introduced. Under this provision, the participation exemption no longer applies to the IoNE, because the IoNE is deductible from the taxable profit base in Brazil. (ITP: anti-avoidance legislation for hybrid mismatches)
Brazil imposes a withholding tax of 15% on IoNE payments. Since due to the introduction of Article 13, Paragraph 17 of the Dutch Corporate Income Tax Act the IoNE is no longer exempt under Dutch tax law, but is now subject to Dutch taxation, the source tax withheld may be creditable. This has raised the question which TSC applies to IoNE under the Treat? Article 23, Paragraph 4 of the DTA provides for a TSC of 25% in the case of dividends as referred to in Article 10 of the Treaty, and a TSC of 20% in the case of interest as referred to in Article 11 of the Treaty.
To determine the applicable TSC for the IoNE, it is therefore important to assess whether the IoNE qualifies as a dividend or as interest for the purposes of the Tax Treaty. Based on the wordings of Article 10, Paragraph 3 and Article 11, Paragraph 4 of the Tax Treaty, the decisive factor is how the source country (the country from which the payments are made) treats the income under its tax legislation. In Brazil, the IoNE is treated as interest for tax purposes. This classification is followed for the purposes of the Tax Treaty. Therefore, the IoNE qualifies as interest under the Tax Treaty. This means that under the Tax Treaty, a TSC of 20% applies to the IoNE.”
2.6. In the context of the classification of the IoNE under the Dutch-Brazilian DTA, a mutual agreement procedure was conducted pursuant to Article 25 of said DTA. The outcome of this procedure was recorded in the Decree Confirming the Classification of Brazilian Interest on Net Equity of March 16, 2022 (the MAP Decree). The MAP Decree states – insofar as relevant – the following:
“JCP was introduced in Brazilian law (by Art. 9 of Lei nº 9249/1995) after conclusion of the Convention. Therefore, the Convention does not specifically address whether, under the Convention, JCP should be considered as a dividend as defined in paragraph 3 of Article 10, or as interest as defined in paragraph 4 of Article 11 of the Convention.
JCP is a remuneration that a company organized under Brazilian law can elect to pay to its shareholders on the basis of the net equity of the company. Since JCP is calculated on the basis of the net equity of the company and paid to shareholders only in the existence of profits of the current period, accumulated earnings or profit reserves of previous periods, it could raise doubts whether it can be qualified as a dividend (Art. 10 of the Convention) or interest (Art. 11).
After discussing the issue, among other reasons, the competent authorities considered that the following elements should be taken into consideration for the qualification of JCP.
First, JCP is treated as interest for Brazilian tax purposes, meaning that JCP is deductible for the payer and taxable with the payee for corporate income tax (in Portuguese: Imposto de Renda das Pessoas Jurídicas) and social contribution on the net profits (in Portuguese: Contribuição Social Sobre o Lucro Líquido) purposes, and that withholding tax is levied on JCP.
Second, Art. 10(3) and Art. 11(4) of the Convention read as follows:
Art. 10 Dividends – 3. The term ‘dividends’ as used in this Article means income from shares, ‘jouissance’ shares or ‘jouissance’ rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
Art. 11 Interest – 4. The term ‘interest’ as used in this Article means income from government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as other income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises.
Thus, in specific cases, the Convention indicates that the qualification should follow the taxation treatment of the residence country of the company making the distribution of dividends or the residence country of the payer of the interest.
Considering the above, the Competent Authorities wish to clarify the treatment of JCP under the Convention. The Competent Authorities have agreed that for the purpose of applying the Convention, in accordance with Brazilian tax law, JCP is considered interest within the meaning of paragraph 4 of Article 11 of the Convention.”
Procedure before the District Court of The Hague
The taxpayer appealed against the decision of the tax inspector. In its judgment of April 30, 2024 the District Court of The Hague ruled that the taxpayer is entitled to the tax sparing credit of 25% as applicable to dividends for the IoNE distributions received.
The tax inspector appealed against the judgment of the District Court of The Hague. In its judgment of March 13, 2025 the Court of Appeal of The Hague ruled on this appeal.
Judgment of the Court of Appeal
The Court of Appeal of The Hague ruled as follows:
‘"In view of the foregoing, the IoNE distributions qualify as income from shares as referred to in Article 10, Paragraph 3 of the Dutch-Brazilian DTA, and therefore constitute dividends for the purposes of said DTA. Consequently pursuant to Article 23, Paragraph 4, under a of the DTA, the taxpayer is entitled to a tax sparing credit of 25%, and in connection therewith to an amount of creditable withholding tax of €769,391 (2019) and €477,558 (2020), respectively. The appeal is unfounded."’
From the legal assessment as made by the Court of Appeal of The Hague
Treaty framework
5.1. Article 10, Paragraph 3 of the Dutch-Brazilian DTA reads as follows:
“The term “dividends” as used in this Article means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.”
5.2. Article 11, Paragraph 4 of the Dutch-Brazilian DTA reads as follows:
“The term “interest” as used in this Article means income from government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as other income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises.”
Characteristics of IoNE
5.3. The IoNE was introduced into Brazilian tax law by Article 9 of Law (Lei) No. 9,249/1995 of December 26, 1995. The IoNE is a remuneration paid by a company exclusively to its shareholders in their capacity as shareholders, in proportion to their shareholding and based on the net equity of the distributing company. This remuneration is calculated according to the official Brazilian interest rate that is applicable to long-term loans. Payment of the IoNE requires prior approval from the shareholders.
Two limits apply to the distribution of the IoNE:
(i) 50% of the annual profit before deduction of the IoNE and corporate income tax (but after deduction of the social contributions), and
(ii) 50% of the total retained earnings of the distributing company.
The distributed IoNE paid is deductible for Brazilian corporate income tax purposes at the level of the distributing company and is subject to a 15% Brazilian withholding tax. This withholding tax can be credited against the corporate income tax for Brazilian resident corporate shareholders and is a final tax for individual residents and foreign taxpayers. A 25% withholding tax applies if the IoNE is distributed to foreign taxpayers that are established in low-tax jurisdictions.
IoNE for the application of the Dutch-Brazilian DTA
5.4. The Inspector takes the position that, under the DTA, the taxpayer is entitled to a tax sparing credit of 20% with respect to the gross income of €38,010,478 it received in 2019 from its participation. The Inspector argues that the IoNE should be classified as interest within the meaning of Article 11, Paragraph 4 of the DTA. According to the Inspector, pursuant to Article 31 Paragraph 1 of the Vienna Convention on the Law of Treaties (the Vienna Convention), the DTA must be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the DTA in their context and in the light of the object and purpose of the DTA. Furthermore, pursuant to Article 31, Paragraph 3, under a of the Vienna Convention, any subsequent agreement between the (ITP: treaty) parties regarding the interpretation of the DTA or the application of its provisions must be taken into account. According to the Inspector the MAP Decree (see 2.6), constitutes such an agreement. Article 11, Paragraph 4 of the DTA contains the broader definition of the term “interest” as was included the 1963 OECD Model Convention, and which wass not included in the 1977 OECD Model Convention. This, the Inspector argues, is consistent with the explicit reservation made by Brazil with respect to that provision in the 1977 OECD Model Convention. Therefore, the context of the Treaty implies that, in determining whether the IoNE qualifies as a dividend or as interest, one should follow the qualification given by the source state. Since Brazilian tax law treats the IoNE as financial income/expense, Brazil treats the IoNE in a manner comparable to interest. This position has been confirmed by the competent authorities in the MAP Decree, the Inspector argues. The taxpayer has disputed the Inspector’s arguments with reasoned pleas.
5.5. Contrary to the Inspector’s argues with respect to the IoNE, Articles 10, Paragraph 3 and 11, Paragraph 4 of the DTA do not imply that particular weight must, by definition, be attached to the manner in which Brazil, as the source state, treats the IoNE under its tax legislation. Such consideration only becomes relevant if, in the case of Article 10, Paragraph 3 of the DTA, the income qualifies as “income from other corporate rights which is subjected to the same taxation treatment as income from shares” and in the case of Article 11, Paragraph 4 of the DTA, if the income qualifies as “other income assimilated to income from money lent.” In the underlying case, it must therefore first be assessed whether the IoNE qualifies as “income from shares” within the meaning of Article 10, Paragraph 3 of the DTA.
5.6. The term “income from shares” is not defined as such in the DTA. In the absence of such a definition, pursuant to Article 3, Paragraph 2 of the DTA unless the context requires otherwise the interpretation of this term by the Netherlands must be based on its meaning under Dutch tax law. Accordingly, the meaning of the term “income from shares” under Dutch tax law takes precedence over the meaning attributed to it under Brazilian tax law.
5.7. According to Dutch tax law, IoNE distributions qualify as income from shares. In this regard, the Court refers to the civil law characteristics outlined in 5.3 above. Namely that the IoNE is paid to shareholders solely by a decision of the shareholders, in their capacity as shareholders, by virtue of and in proportion to their shareholding, and subject to the existence of profits. The IoNE distributions thus bear such strong similarities to dividends under Dutch civil law that for the purposes of the Dutch Corporate Income Tax Act, they must be regarded as income from shares (cf. Dutch Supreme Court judgment of February 7, 2014, ECLI:NL:HR:2014:224, BNB 2014/79, court considerations. 3.3.1–3.3.3).
5.8. The Court furthermore takes into consideration that, in the case of a qualifying shareholding, until January 1, 2016 the participation exemption of Article 13 of the Dutch Corporate Income Tax Act applied to IoNE distributions. Pursuant to Article 13, Paragraph, 17 of the Dutch Corporate Income Tax Act, as in force as of January 1, 2016, IoNE distributions are still regarded as benefits derived from a participation, although they are excluded from the participation exemption due to their deductibility from the corporate income tax base in Brazil (see Parliamentary Documents II 2015/16, 34 302, no. 18, p. 25). The fact that the IoNE is, like interest, tax-deductible at the level of the paying company therefore does not alter the fact that the Netherlands treats it, for tax purposes, as a benefit derived from share ownership.
5.9. In the Court’s view, the context of the DTA does not require an interpretation of the term “income from shares” other than the interpretation under Dutch tax law. Article 10, Paragraph 3 of the DTA corresponds with Article 10, Paragraph 3 of the 1977 OECD Model Convention. In light of the commentary on Article 10 of the 1977 OECD Model Convention, particularly paragraphs 24 and 28, the interpretation of the term “income from shares” should primarily refer to profit distributions made pursuant to a resolution of the general meeting of shareholders and by virtue of the ownership of shares in a company of which the capital is divided in shares. The context of the DTA therefore confirms the interpretation of the term “income from shares” in accordance with Dutch tax law.
5.10. The IoNE distributions therefore fall under “income from shares” as referred to in Article 10, Paragraph 3 of the DTA. This means it is out of the question that the IoNE fall under “income from other corporate rights” as referred to in Article 10, Paragraph 3 of the DTA to which the Inspector refers. In this context, the manner in which the IoNE is taxed under Brazilian law is not relevant. The reference to the national law of the source state pertains only to the final part of the definition of the term “dividends,” and not to the other elements of the definition, including the term “income from shares.”
5.11. The question, then, is whether for the purposes of the DTA the IoNE can also be classified as interest. And if so, how the overlap between Article 10 and Article 11 of the DTA should be addressed. It is not in dispute that the IoNE distributions do not qualify as “income from government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind” within the meaning of Article 11, Paragraph 4 of the DTA. Therefore, the only issue to be assessed in this respect is whether these distributions are assimilated to income from money lent under Brazilian tax law. Contrary to what the Inspector’s argues, answer to the question whether Brazilian tax law treats these distributions in a manner comparable to interest is not relevant, since “treating in a comparable manner” is a broader standard than “assimilating to.”
5.12. Article 9 of Law (Lei) No. 9,249/1995 of December 26, 1995 does not explicitly provide that the IoNE is to be assimilated to interest for Brazilian tax purposes. Nor does such assimilation follow from the way in which Brazilian tax law treats the IoNE. Based on the case documents, including the memorandum from the International Bureau of Fiscal Documentation of May 6, 2019, the Court finds as follows. The taxation of IoNE distributions under Brazilian tax law is based on a different legal basis than the taxation of financial income and expenses. Moreover, different deduction limitations and exemptions apply. The taxation of financial income and expenses is also subject to different rates than the fixed withholding tax rate of 15% on IoNE distributions and the 25% withholding tax rate on IoNE distributions paid to foreign taxpayers in low-tax jurisdictions. Although these withholding tax rates generally also apply to interest paid to foreign taxpayers, certain types of interest are subject to different rules or receive a more favorable treatment. In domestic situations, income from loans and other fixed-interest investments is subject to a withholding tax at a regressive rate that is depending on the duration of the loan or investment. A rate of 22.5% applies to transactions with a duration of up to 180 days, 20% for transactions lasting from 181 to 360 days, 17.5% for those lasting from 361 to 720 days and 15% for transactions with a duration of more than 720 days. IoNE distributions are also subject to the “Contribuição para o Programa de Integração Social PIS” (a contribution to the employee participation program) and the “Contribuição para o Financiamento da Seguridade Social COFINS” (a contribution to social security financing) at a special combined rate of 9.25%, which differs from the general combined rate of 4.65% that applies to financial income and expenses.
5.13. In light of the foregoing, the Court is of the opinion that, under Brazilian tax law, IoNE distributions are not assimilated to income from money lent. The IoNE can therefore not also qualify as interest within the meaning of Article 11, Paragraph 4 of the DTA. As a result, no potential overlap between Article 10 and Article 11 of the DTA does arise.
The MAP Decree
5.14. The tax inspector argues that, pursuant to Article 31, Paragraph 3 under a of the Vienna Convention, the interpretation of the DTA must take into account the subsequent agreement laid down in the MAP Decree. According to the tax inspector, this agreement constitutes a clarification and confirmation of what already followed from the context of the DTA in the years prior to the entry into force of the MAP Decree. Namely, that Brazil’s qualification of the IoNE as interest is to be followed (see 5.4 above).
5.15. It is established that at the time the DTA was concluded in 1990, the IoNE did not yet exist. Therefore the contracting parties had not reached an agreement regarding the qualification of the IoNE for treaty purposes at the time of concluding the DTA. In the opinion of the Court, no account needs to be taken of the subsequent agreement that is laid down in the MAP Decree, in which the competent authorities classify the IoNE as interest. The Court disregards this agreement, already because it had not yet been reached during the years at issue and could only be relevant for the interpretation of the DTA from the moment it was properly disclosed to the public.
Conclusion
5.16. In light of the foregoing, the IoNE distributions qualify as income from shares as referred to in Article 10, Paragraph 3 of the DTA, and therefore constitute dividends for DTA purposes. Pursuant to Article 23, Paragraph 4, under a of the DTA the taxpayer is thus entitled to a tax sparing credit of 25%, and in connection therewith, to an amount (of €769,391 (2019) and €477,558 (2020)), respectively of withholding tax to be credited. The appeal is unfounded. (Note of ITP: The appeal was filed by the tax inspector)
Links to the text of the judgments
The following links forward you to the texts of the 3 judgments of the Court of Appeal of The Hague as published on the website of the Dutch courts. The judgments are only available in the Dutch language.
Further information regarding the MAP Decree
It should be noted that already in 2021 during a Mutual Agreement Procedure the Competent Authorities of the Netherlands and Brazil came to an agreement on how JCP distributions where to be treated for DTA purposes. However, the outcome was only made public by the publication of the MAP Deceree of March 16, 2022 (a Decree issued by the Dutch Secretary of Finance) in the Dutch State Gazette of April 4, 2022. The text of the MAP Decree as published in the Dutch State Gazette of April 4, 2022 can be found here.
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