Brazilian IRS reaffirms IoE classification as interest under Brazil–Spain DTT

In brief

On March 9, 2026, the Brazilian IRS issued Interpretative Declaratory Act (ADI) # 3, clarifying that interest on net equity (IoE) paid, credited, or remitted by Brazilian companies to partners or shareholders resident in Spain must be classified as interest under Article 11 of the Brazil–Spain Double Tax Treaty (DTT), rather than as dividends under Article 10.

In more detail

The discussion regarding the proper classification of IoE under tax treaties is not new, but it has gained renewed relevance following recent legislative changes:

• as of January 1, 2026, profits and dividends paid abroad became subject to Brazilian withholding income tax (WHT) at a 10% rate; and
• the WHT rate applicable to IoE was increased from 15% to 17.5%.

The controversy stems from the hybrid nature of IoE: while it represents remuneration of invested capital from the shareholder’s perspective, it is deemed as a financial expense for the paying company.

The Brazilian IRS had previously addressed this issue in the context of other DTTs, such as the Brazil–Canada DTT, recognizing IoE as interest (COSIT Rulings # 125/2018 and # 99015/2018), based on its treatment under domestic law and its objective of aligning the tax treatment of equity and debt financing. Moreover, in more recent DTTs, Brazil has expressly provided for its classification as interest, reflecting a consistent evolution of its treaty policy.

Brazilian IRS position therefore reinforces the position that IoE should be deemed as interest for purposes of applying DTTs, thereby limiting Brazilian withholding taxation to a 15% rate. This interpretation may have a relevant impact both on the determination of the applicable WHT rate and on the assessment of tax risks in international structures and transactions involving the payment of IoE.