Dutch Court of Appeal confirms dividend qualification for Brazilian IoNE - favorable tax sparing credit applies

A Dutch BV received a €38 million payment from its Brazilian subsidiary in 2019, classified under Brazilian law as "Interest on Net Equity" (IoNE). Legally, IoNE is a form of profit distribution made exclusively to shareholders, proportionate to their shareholding, subject to available profits and shareholder approval. Under Dutch civil law, this resembles a dividend.

Since 2016, Dutch corporate income tax law excludes from the participation exemption any payments that are deductible for foreign tax purposes. Because IoNE is deductible in Brazil, the full €38 million was taxable in the Netherlands. At the then applicable 25% Dutch corporate income tax rate, this led to €9.5 million of Dutch tax due.

However, under the Netherlands-Brazil tax treaty, relief is available through a favorable "tax sparing credit" if the payment qualifies as a dividend (25% credit) or, alternatively, as interest (20% credit). If the payment qualifies as a dividend, the Dutch corporate tax is fully neutralized by the treaty credit. If classified as interest, a residual Dutch tax liability remains.

The Dutch tax authorities argued that IoNE should be treated as interest for treaty purposes, resulting in additional Dutch tax. The taxpayer disagreed, arguing that IoNE qualifies as a dividend both under Dutch domestic law and the treaty.

Both the District Court (2024) and the Court of Appeal (2025) ruled in favor of the taxpayer. They confirmed that IoNE qualifies as a dividend: the payments are legally and economically linked to shareholding and profit entitlement, despite being deductible under Brazilian law. The fact that Brazil allows deduction does not override its character under Dutch law or the treaty.

The tax authorities also pointed to a Mutual Agreement Procedure (MAP) between the Netherlands and Brazil, concluded in 2022, which classifies IoNE as interest for treaty purposes. The courts held that this MAP, which took effect after the year in dispute, had no retroactive effect for 2019.

For IoNE payments made after 2022, the MAP outcome may apply, potentially limiting the treaty credit to 20%. However, some technical discussion remains whether dual qualification could still trigger the more favorable outcome under certain circumstances.

The case is now before the Supreme Court. We continue to monitor developments.