On 13 March 2025, the Dutch Court of Appeal ruled that Brazil’s “Interest on Net Equity” (IoNE) qualifies as a dividend – not as interest – for purposes of the tax treaty between the Netherlands and Brazil. As a result, the taxpayer is entitled to a 25% tax sparing credit (TSC), rather than the 20% granted by the Dutch Tax Authorities (DTA).
What is IoNE?
IoNE is a remuneration that a company organized under Brazilian law can elect to pay to its shareholders on the basis of the net equity as an alternative to regular dividends. While similar to dividends from a civil law perspective, IoNE is, like interest, tax-deductible in Brazil and subject to withholding tax. This hybrid character raises the question: should IoNE be treated as dividend or interest for treaty purposes?
The relevance of this distinction lies in the fact that the tax treaty grants a higher TSC for dividends (25%) than for interest (20%). The TSC, can be offset against the Dutch corporate income tax due on the IoNE income. The credit is granted regardless of the amount of tax actually withheld by Brazil. Treating IoNE as dividend for treaty purposes thus results in a more favourable tax outcome for Dutch taxpayers.
What view do the tax authorities take?
The DTA themselves have struggled with the treaty qualification of IoNE. For domestic Dutch tax purposes, IoNE is treated as a dividend. Consistent with this, the DTA initially took the position – up until 18 October 2018 – that IoNE should also be treated as dividend under the tax treaty. However, they later changed course, asserting that IoNE should instead be classified as interest for the purposes of treaty application.
In 2022, the Dutch and Brazilian competent authorities reached a mutual agreement stating that IoNE should be qualified as interest under the treaty. This position was recorded in a Mutual Agreement Procedure (MAP) decision published on 4 April 2022. The case before the Court of Appeal concerned IoNE payments made in 2019, i.a., after the DTA’s change in position, but prior to the publication of the MAP decision.
What view does the Court take?
The lower court had already ruled that, based on its civil law characteristics, IoNE should be treated as dividend for treaty purposes. While the lower court did not exclude that IoNE might also qualify as interest, the court emphasised that – at least until publication of the MAP decision in 2022 – the treaty qualification of IoNE payments remains ambiguous. According to the court, this ambiguity regarding the qualification of IoNE should not be to the disadvantage of the taxpayer in case of reasonable doubt, meaning that for 2019 the taxpayer was entitled to the full 25% TSC applicable to dividends. The court further held that the MAP decision could not be invoked retroactively to the disadvantage of the taxpayer.
The Court of Appeal upheld the lower court’s ruling and went a step further. It conducted a more detailed assessment of the classification of IoNE and concluded unequivocally: IoNE qualifies as a dividend, not interest. The fact that both IoNE and interest are deductible under Brazilian tax law does not in itself justify treating IoNE as interest for treaty purposes. On the contrary, the Court of Appeal identified material differences in the Brazilian tax treatment of IoNE and interest, which preclude their assimilation for treaty purposes. Accordingly, there can be no question of treating IoNE as interest under the tax treaty.
The Court of Appeal also rejected the DTA’s position that the Brazilian tax treatment should be decisive for the treaty classification. Instead, the Court held that Dutch domestic tax treatment should take precedence – in this case, classification as a dividend – unless the context of the treaty dictates otherwise. According to the Court, no such exception applies as the context of the treaty supports the classification of IoNE as dividend.
The Court further noted that the later agreement reflected in the MAP decision should not affect the qualification of IoNE received in 2019, as it was published only after the fact. The lower court had reached the same conclusion.
What about years after 2022?
Neither the lower court nor the Court of Appeal addressed the question of whether the qualification given in the MAP decision should be followed for tax years after its publication on 4 April 2022. In our view, this position remains open to challenge, as the interpretation set out in the MAP decision directly contradicts the text and context of the treaty as interpreted by the Dutch courts. This raises the question of whether the Dutch and Brazilian tax authorities may have exceeded their mandate in reaching the MAP agreement. Since an appeal has been lodged with the Dutch Supreme Court, the final word on this matter has yet to be spoken.
Want to learn more?
For further insights into the implications of this decision and how it might affect ongoing disputes or IoNE payments made since 2022, feel free to contact Jochem Kin or Joris Bouma.
Source: ECLI:NL:GHDHA:2025:858, Gerechtshof Den Haag, BK-24/581