Brief commentary to the ruling dated 16th of March 2016 from the Spanish Supreme Court.
The Spanish Supreme Court has recently had the opportunity to issue a ruling with regard to the tax treatment of the controversial “juros sobre o capital propio” from Brazil (“Juros“). Shareholders of Brazilian companies can resort to these instruments as a method, other than dividends, through which to obtain a return on their equity investment. Additionally, Juros, for which there is no equivalent under Spanish law, can be tax deductible for the Brazilian company making such distributions.
Until now, the position favoured by Spanish Tax Authorities and by the Spanish Central Tax Tribunal (Tribunal Económico Administrativo Central) has been to assimilate Juros to interest payments. In February 2014, however, the Spanish National Court (Audiencia Nacional) overruled the Spanish Central Tax Tribunal and held that Juros should be treated as returns on equity. This view has now been upheld by the Spanish Supreme Court (Tribunal Supremo), in its recent ruling dated 16th march 2016.
For the Spanish Supreme Court, therefore, Juros are akin to an equity return since they are directly related to the profits obtained by the subsidiary and since the payment of such Juros may only be claimed on the basis of a holding in the company’s capital. Juros cannot, therefore, be considered interest payments, since neither do they amount to returns on a loan, nor are they calculated on the basis of any outstanding principal. Therefore, the income derived from such Juros should be eligible for the Spanish participation exemption regime, provided for under Article 21 of the previous Spanish Corporate Income Tax Law.
The Spanish Supreme Court also confirms that Juros would fulfil the conditions imposed by such participation exemption regime, namely the requirement whereby the profits, out of which the Juros are distributed, have been subject to tax in their host country (the “subject-to-tax” test). In this respect, the fact that, as a general rule, Brazilian income tax is imposed on the Brazilian subsidiaries is deemed sufficient by the Court and the tax deductibility in Brazil of such Juros is not considered of special relevance. Moreover, the ruling also notes that the existence of a Tax Treaty entered into by Brazil and Spain entails that this “subject to tax test” should be considered as having been fulfilled.
This ruling should assist in finally resolving the controversy surrounding these Brazilian Juros. It should, furthermore, contribute towards providing these investments with some much-needed legal certainty. It worth noting, however, that the amendments to Spanish Corporate Income Tax, with the inclusion of OECD recommendations as regards anti-hybrid rules, have limited the practical importance of structures involving Juros. Thus, one such anti-hybrid measure specifically provides that the exemption will not be available in cases where the dividend has led to a deductible expense for the payer. Such rule would therefore disqualify Brasilian Juros from the scope of the Spanish participation exemption.