News Update Tax

The Dutch State Secretary of Finance issues Decree on the qualification of Brazilian 'Interest on net equity'
04 September 2020
4 September 2020

On 27 August 2020, the Dutch State Secretary of Finance ("State Secretary") issued a Decree ("Decree") on the qualification of Brazilian 'Interest on net equity' ("IoNE") for the double-tax treaty concluded between the Netherlands and Brazil (the "Treaty"). The Decree entered into force on 28 August 2020. The qualification of IoNE is important for the tax-sparing credit that the Netherlands will grant under the Treaty. In this News Update, we will discuss the Decree and its effect.


If a Dutch resident company owns a qualifying interest in a Brazilian subsidiary, dividends received from this subsidiary and capital gains realised on it are exempt from Dutch corporate income tax ("CIT") under the participation exemption rules. For CIT purposes, IoNE is considered to be a dividend received from the participation. Therefore, in principle, the participation exemption applies to IoNE. However, new legislation entered into force on 1 January 2016 which resulted in the Dutch participation exemption no longer applying to payments received from participations that are tax deductible at the level of the participation. This means that the participation exemption no longer applies to IoNE because IoNE is tax deductible in Brazil.

As a result, IoNE received by a Dutch resident company is included in the Dutch taxable base and subject to CIT. The Treaty contains a tax-sparing credit for withholding tax of 20% for interest and 25% for dividends.

Qualification of IoNE for Treaty purposes

Under Brazilian civil law, IoNE in principle qualifies as a dividend. However, IoNE is treated as interest for Brazilian tax purposes. This raised the question of whether IoNE income received by Dutch corporate income taxpayers qualified as a dividend or interest for Treaty purposes.

The State Secretary decided in the Decree that the Brazilian tax qualification of IoNE should be taken into account for purposes of the Treaty. Consequently, IoNE qualifies as interest for the purposes of the Treaty. As a result, Dutch corporate income taxpayers are eligible for a tax-sparing credit of 20%.

Given that the Dutch tax authorities agreed to a different position (i.e. that IoNE qualified as dividends for Treaty purposes) in the past, we advise companies to review their current tax position for IoNE.
Written by:
Sylvia Dikmans

Key Contact

Tax Lawyer | Partner
+31 20 605 69 33
+31 6 4316 3074

Key Contact

Tax Lawyer | Partner
+31 20 605 69 82
+31 6 1393 6351