In a judgment dated May 22 2025 – in a case in which Garrigues represented the taxpayer – Spain’s National Court (Audiencia Nacional) declared that interest on equity (juros sobre o capital próprio, or JSCP) received from Brazilian entities qualifies as dividend income for the purposes of the Spain–Brazil double tax treaty (DTT) and is therefore eligible for the exemption method under Article 23.3 of the treaty, regardless of domestic law provisions.
The decision represents a significant development in the interpretation of tax treaties in Spain, reinforcing and further shaping key principles of international tax law – particularly the primacy of treaty provisions over domestic legislation and the importance of their systematic and teleological interpretation.
Background and administrative controversy
JSCP had already been recognised as dividend income following several Supreme Court judgments in 2016, which allowed such payments to benefit from Spain’s previous domestic participation exemption regime. However, as of January 1 2015, the domestic exemption method of Article 21 of the Spanish Corporate Income Tax Law (the CIT Law) was amended to exclude from its scope any dividend distribution that, like JSCP, constitutes a tax-deductible expense for the paying entity.
Despite the changes introduced in the domestic exemption regime, the Spain–Brazil DTT has not been modified and continues to provide for an exemption method without any limitation for dividend payments that can be subject to taxation at source. Given the regulatory divergence between the domestic exemption regime and the broader exemption method under the Spain–Brazil DTT (which is not technically surprising, given their different scope and purpose), the controversy centred on whether the treaty exemption could apply to JSCP, irrespective of the limitation included in domestic law.
In this regulatory context, the Spanish Tax Agency (STA), in the case at hand, denied the applicability of both the domestic and treaty exemption methods to JSCP. The STA’s position was based on prior rulings (V2960-16 and V2962-16) issued by the General Directorate of Taxes (GDT).
While, in line with previous judgments, the STA accepted the characterisation of JSCP as dividends under domestic law – and therefore denied the domestic exemption of Article 21 of the CIT Law, which has been limited since 2015 – it argued that, for treaty purposes, JSCP should be treated as interest due to its tax treatment in Brazil. Accordingly, the STA also denied the application of the exemption method under Article 23.3 of the DTT, which applies only to dividends. Instead, the STA applied Article 23.2 of the DTT, which provides for the credit method applicable to interest – resulting in higher Spanish taxation.
The National Court’s decision: treaty law prevails
The National Court firmly rejected the STA’s approach, holding that treaty provisions, as part of international law, must generally prevail over domestic law. Accordingly, domestic provisions may apply only to the extent that they do not contradict the content or purpose of the treaty.
The National Court further held that:
The Spain–Brazil DTT clearly classifies JSCP as dividends rather than interest;
Rulings by the GDT do not constitute a source of law and cannot override the provisions of a treaty; and
Domestic rules under the Spanish CIT Law are not applicable when they conflict with the purpose of the treaty.
In line with the above, the National Court concluded that JSCP may benefit from the exemption provided under Article 23.3 of the Spain–Brazil Double Tax Treaty, as argued by the taxpayer.
Practical implications
This judgment not only provides valuable legal certainty for Spanish multinationals with operations in Brazil – confirming that JSCP qualifies for exemption in Spain under the Spain–Brazil DTT, regardless of the more limited scope of the Spanish domestic exemption regime – but also reinforces and further defines the fundamental principle of the primacy of tax treaty law.
Indeed, the judgment confirms that the primacy of tax treaty law cannot be overridden by introducing limitations in domestic legislation that are not provided for in the treaty itself. By doing so, it helps to define the boundaries of domestic law in relation to treaty law, and its reasoning could serve as a reference for other taxpayers seeking to apply the provisions of Spain’s tax treaties, despite limitations or legislative changes introduced into Spanish domestic legislation.
