Spain: Spanish Supreme Court confirms that Brazilian ‘juros sobre o capital próprio’ can benefit from Spanish participation exemption regime

Rafael Calvo	Elisa San Salvador

On March 16 2016 the Supreme Court handed down a relevant judgement on the tax treatment for Spanish tax purposes of the 'juros sobre o capital próprio' (JSCP) distributed by Brazilian affiliates to their Spanish parent companies.

The judgment resolved the cassation appeal lodged by the Government Attorney against the judgment dated February 27 2014 handed down by the National Court which confirmed, for the first time, that JSCP could benefit from the Spanish participation exemption regime. The National Court reconfirmed its criterion in a decision dated July 9 2015. However, the criterion from the Spanish highest court was pending until the recent decision issued on March 16 2016 by the Supreme Court.

JSCP are profits distributed by Brazilian companies to their shareholders that allow for a tax deduction for Brazilian corporate income tax (CIT) purposes. JSCP were subject to 15% withholding tax under Brazilian domestic law in the years under review.

In turn, the Spanish tax authorities understood that JSCP could not benefit from the Spanish participation exemption regime since the presumed characterisation of JSCP as interest for Brazilian tax purposes determined its characterisation for Spanish tax purposes. Instead, a tax credit was granted at a 20% rate under the tax sparing clause contained for interest payments in the Brazil-Spain double tax convention (DTC).

The Spanish Supreme Court decision is brief and conclusive.

On the one hand, it makes clear that it is the characterisation of the income for legal purposes (and not for Brazilian tax purposes) what determines Spanish taxation. In this regard, JSCP are equivalent to a distribution of profits and not to interest income. Basically, the Supreme Court notes that JSCP derive from the existence of profits and that they are shareholders who are entitled to them. Additionally, JSCP neither remunerate nor are calculated in relation to outstanding debts. Therefore, JSCP qualify as "dividends or participation in profits" under the Spanish participation exemption regime.

On the other hand, the Supreme Court concludes that JSCP were effectively subject to tax in Brazil within the Brazilian entities when the profits distributed were obtained. Moreover, the irrefutable presumption contained in Spanish legislation whereby taxation would be considered to have taken place when the affiliate is resident in a country with which Spain has signed a DTC that contains an exchange-of-information clause would apply. Therefore, economic double taxation would indeed exist and so Spain should avoid it.

Please note that the Spanish Supreme Court judgment refers to the former revised Corporate Income Tax Law. However, from January 1 2015, new Corporate Income Tax Law 27/2014 sets forth that participation exemption will not apply to profits whose distribution generates a tax deductible expense for the affiliate. In any case, the Brazil-Spain DTC sets forth the exemption method – without any qualification as regards the deductibility of payments – to eliminate double taxation of dividends. Thus, the controversy may not have ended as regards to 2015 and following fiscal years.

Rafael Calvo (rafael.calvo@garrigues.com) and Elisa San Salvador (elisa.san.salvador@garrigues.com), Madrid
Garrigues
Tel: +34 915145200
Website: www.garrigues.com

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