This is the fourth of our series of posts on Brazilian tax treaties. In each post we provide an overview of a specific tax treaty between Brazil and a particular foreign country, as well as comments on any Brazilian administrative or judicial precedents applying the treaty, and highlights on the impact of the OECD Base Erosion and Profit Shifting ("BEPS") project in its application.

Overview of the treaty

Decree 76,975, published on January 05, 1976, contains the text of the Bilateral Income Tax Treaty signed by Brazil and Spain ("Treaty"). This Treaty is aimed at preventing double imposition and double non-imposition of income taxes in cross-border operations between the two countries.

For Brazilian purposes, as of December 09, 2015, the treaty generally applies not only to the Individual and Corporate Income Taxes ("IRPF" and "IRPJ") and to the Withholding Income Tax ("WHT"), but also to the Social Contribution on Net Profits ("CSLL"). In particular, though, the Treaty with Spain establishes in Article 24 that the principle of non-discrimination between the tax treatment of Brazilian and Spanish nationals/residents applies to all taxes labeled as "impostos", not only the ones applicable to income. We discuss the application of this Article in further detail below.

With regard to CSLL, this tax is not expressly mentioned in the Treaty, because it was created after its signature, and as a partial replacement of IRPJ. However, recent Law 13,202/2015 clarifies that Bilateral Income Tax Treaties signed by Brazil include CSLL:

Art. 11. For purposes of interpretation, the international agreements and conventions signed by the Government of the Federative Republic of Brazil to avoid double taxation include CSLL.

Please note that our reference to the Withholding Income Tax ("WHT") in the next paragraphs does not describe the entire tax burden imposed on certain income streams, such as royalties, for example. Other taxes may be imposed on cross-border royalty payments (such as the Special Tax on Royalties ("CIDE"), the Municipal Tax on Services ("ISS") and the Tax on Foreign Exchange Transactions ("IOF-FX")), but because these taxes do not qualify as "income taxes", they are outside of the scope of the Treaty.

It is also important to highlight that although Spain is one of our Treaty partners, the country is mentioned in our list of favorable fiscal regimes ("graylist"). Specifically, Brazilian authorities consider that the Spanish regime applicable to legal entities incorporated as Entidades de Tenencia de Valores Extranjeros ("ETVE") is a graylisted regime.1

Since the publication of Executive Declaratory Act RFB 22, on December 02, 2010, the Federal Revenue Secretariat of Brazil ("RFB") has suspended Spain from the graylist, but the suspension may be terminated at any moment, either to reinstate the regime (which is what happened to the Netherlands on December 2015) or to remove it definitively (which is what happened to Luxembourg in 2011 and Hungary in 2014). In this post, we will address the interplay between the terms of the Treaty and the potential future qualification of the Spanish beneficiary as a graylisted company.

The Treaty was generally based on the OECD Draft Convention available at the time (1963), as well as on Brazilian tax treaty practice prior to 2000. Key aspects of this Treaty from a Brazilian perspective are:

  • Source taxation

Dividends, interest and royalties earned are generally subject to WHT in Brazil and to a WHT credit in Spain and vice-versa. Specifically:

  • For dividends received by a beneficial owner resident in Brazil, the maximum WHT is 15%. For the recipient, the dividends will be subject to a regular tax credit (i.e., a tax credit for the WHT actually imposed) if the payor is an ETVE.2 Otherwise, the dividends will be subject to an exemption from IRPJ and CSLL.3

For dividends received by a beneficial owner resident in Spain, the maximum WHT is generally set at 15%. If, however, the person receiving the dividends is a Spanish legal entity that owns at least 25% of the voting stock of the Brazilian payor, the WHT is reduced to 10%.4

Under current Brazilian Law, dividends paid to Brazilian or foreign recipients are exempt from WHT.5

  • For interest received by a beneficial owner resident in a Contracting State, the maximum WHT is generally set at 15%. If, however, the recipient is a bank and if the loan is granted for a minimum term of 10 (ten) years, related with the purchase of assets and equipment, the maximum WHT drops to 10%.

A tax sparing credit may be available for the Spanish recipient as well as for the Brazilian recipient of interest (see below). In Brazil, the tax sparing credit may be used to offset applicable IRPJ and CSLL.

For interest received in the following situations, an exemption or non-imposition of WHT may be available:

(1) Interest arising in a Contracting State and paid to the Government of the other Contracting State, including its political subdivision or local authority, or to any of its branches (even a financial institution), or to a political subdivision thereof, is exempt from WHT in the first Contracting State.

(2) Interest from obligations, bonds or debentures issued by the Government of a Contracting State or by any of its branches (even a financial institution), shall only be taxed in this Contracting State.

Under current Brazilian Law, interest paid to foreign recipients is subject to a WHT of 15%.6

  • For royalties derived from trademark use, the maximum WHT rate is 15%. In all other cases (including payments for technical services and technical assistance), the maximum WHT rate is 10%.7

A tax sparing credit may be available for the Spanish recipient as well as for the Brazilian recipient of royalties (see below). In Brazil, the tax sparing credit may be used to offset applicable IRPJ and CSLL.

Under current Brazilian Law, royalties paid to foreign recipients (including payments for technical services and technical assistance) are subject to a WHT of 15%.8

  • Capital gains, differently from the OECD Model Convention, are taxable in both Contracting States, and there is no WHT limitation in the Treaty. The only exception is Article 13, paragraph 2, which determines that gains obtained from alienation of ships and aircrafts are taxable only in the country where the headquarters of the company are located.

Under current Brazilian Law, capital gains obtained by foreign residents (not located in a tax haven) are subject to a WHT of 15%.9 Source taxation is applicable even in case of non-resident seller and buyer – in this case, the buyer is required to withhold the corresponding amount, nominate an attorney-in-fact in Brazil and cause this attorney-in-fact to collect the WHT due.

There is an intention to increase the WHT from 15% to 22.5% according to the most recent version of the law project proposed by the Government to the Brazilian Congress. This bill, if approved, will be enforceable as of the following calendar year.

  • Beneficial ownership

Unlike more recent Brazilian tax treaties, our Treaty with Spain does not contain the expression "beneficial owner". The treaty uses the term "beneficiary", which may or may not refer to the more specific concept of "beneficial ownership" (it is important to highlight, however, that only in recent treaties has Brazil acquiesced to a specific Limitation on Benefits clause, and only in broad terms).

Brazilian tax authorities view the absence of a treaty definition of "beneficiary", as is the case with the Treaty between Brazil and Spain, as a permission for tax authorities of the State applying the treaty to interpret the expression as they see fit – which opens the gates for an interpretation of "beneficiary" as "beneficial owner". This position is supported by Article 3rd, paragraph 2, of the Treaty, which states:

Article 3rd, Paragraph 2: For the application of this Treaty by a Contracting State, any term not defined herein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies.

  • Tax sparing

The Treaty contains a tax sparing clause, which is a treaty provision that requires Spain to grant tax credits at a deemed WHT rate for specific payments made by Brazilian residents and vice-versa (many of the Brazilian tax treaties that contain tax sparing clauses benefit residents of the other Contracting State, but the Treaty with Spain has a clause applicable to payment streams coming from either Contracting State).

The tax sparing credit is usually greater to the WHT rate applicable under the treaty or domestic law. In the Treaty with Spain, they are:

  • For interest, a tax sparing credit of 20%.
  • For royalties, a tax sparing credit of 25%.
  • Income derived from technical assistance and technical services

In accordance with Item 5 of the Protocol of the Treaty, income derived from technical assistance and technical services is regarded as royalties (Article 12) for Treaty purposes.

This classification is important because Brazilian taxpayers have challenged the imposition of WHT on payments for services to recipients resident in Treaty countries (at the time, Germany and Canada), claiming that the business profits provision of the corresponding agreements (Article 7th) would prohibit taxation at source. The landmark case on this subject, REsp 1161467/RS, was decided in 2012 by the Second Chamber of the Superior Court of Justice ("STJ"), and it was favorable to taxpayers.

Nonetheless, Interpretative Declaratory Act 05, issued on June 16, 2014, by the Federal Revenue Secretariat of Brazil ("RFB"), states that if "income derived from technical assistance and technical services" is regarded as royalties in any particular Treaty, its treatment shall be the one attributed to royalties (Article 12), and not to business profits (Article 7th). Besides, RFB has adopted a very broad concept of "technical services", considering as such any services in which the provider needs "skills, technique and training".

The issue of whether RFB exceeded the limits of its interpretive authority by issuing an Interpretive Declaratory Act that effectively restricted the scope of a court decision by STJ (albeit a non-binding one) is yet to be resolved.

In the meantime, strict compliance with treaty provisions and domestic law would indicate that "income derived from technical assistance and technical services" should be subject to a WHT of 15%, the domestic WHT rate applicable to payments of royalties and technical services.

  • Application of Article 24 to all taxes labeled as "impostos"

Unlike its counterpart in the majority of Brazilian tax treaties, Article 24, paragraph 5 of the Treaty with Spain states that the principle of non-discrimination shall apply to all taxes labeled as "impostos" (and therefore not only to income taxes per se). In other words, Brazil may not discriminate Spanish nationals/residents – nor Brazilian entities controlled by them or Brazilian permanent establishments of Spanish entities – strictly on the basis of nationality/residence for purposes of the following taxes (in addition to IRPJ, IRPF, WHT and CSLL):

  • Federal Excise Tax on Manufactured Products ("IPI");
  • Federal Import and Export Taxes ("II" and "IE");
  • Federal Taxes on Credit, Foreign Exchange, Insurance, Bonds/Titles, and Gold as a Financial Asset or Foreign Exchange Instrument ("IOF/Credit", "IOF/FX", "IOF/Insurance", "IOF/Bonds/Titles", and "IOF/Gold");
  • Federal Tax on Rural Properties ("ITR");
  • Federal Wealth Tax ("IGF"), if ever enacted;
  • State Value-Added Tax ("ICMS");
  • State Tax on Succession and Donation ("ITCMD");
  • State Tax on Automotive Vehicle Property ("IPVA");
  • Municipal Tax on Urban Properties ("IPTU");
  • Municipal Tax on Services ("ISS"); and
  • Municipal Tax on Transfer of Real Estate Property ("ITBI").

In general, Brazilian tax treaties only require the application of the non-discrimination principle to income taxes. This modified clause is a feature of the Treaty with Spain and only ten other treaties (Austria, Belgium, Denmark, Finland, France, Japan, Luxembourg, Mexico, Portugal and Sweden).

  • Interplay between the Treaty and the Spanish graylisted regime ("ETVE")

First and foremost, it is important to stress that the Spanish graylisted regime is currently suspended by Executive Declaratory Act RFB 22, published on December 02, 2010. The suspension may be terminated at any moment, either to reinstate the regime (which is what happened to the Netherlands on December 2015) or to remove it definitively (which is what happened to Luxembourg in 2011 and Hungary in 2014).

The relationship between Brazilian persons and graylisted entities is subject to several tax restrictions under domestic law. Transactions before graylisted entities are automatically subject to transfer pricing rules (irrespective of whether the foreign entity is actually related to its Brazilian counterpart). Thin capitalization limits are decreased from a 2:1 to a 0.3:1 debt/equity ratio. Also, specific Controlled and Affiliated Foreign Company Rules ("CFC") prevent cross-company consolidation and deferred taxation.

Another tax implication of negotiating with a graylisted company is that expenses incurred with such company are only deductible if the taxpayer demonstrates (a) who the beneficial owner is; (b) the economic substance and operational capacity of the graylisted company; and (c) price payment and actual delivery of goods or services rendering.

In general, graylisted entities are not subject to increased levels of WHT in Brazil (this increased tax burden is applicable to tax havens, popularly known as our "blacklist"). The exception to this rule are payments for a list of specific services – their remuneration, if paid to a non-graylisted (and non-blacklisted) entity, is subject to a WHT of zero. However, if paid to a graylisted entity, the rate is increased to 15%:10

  • Services of assessment of compliance, metrology and normalization.
  • Services of sanitary and phytosanitary inspection.
  • Services of homologation and registration.
  • Other procedures required by the Importing Country, under the scope of the agreements dealing with sanitary and phytosanitary measures ("SPS"), and with technical barriers to trade ("TBT"), both as provided by the World Trade Organization ("WTO").

The services in this list are decidedly technical services under Brazilian Law, because the same legal provision used to reduce WHT to zero for non-graylisted (and non-blacklisted) entities also reduces CIDE to zero, and this tax is only applicable to technical services. The question in this case would be: could the Treaty be used to prevent Brazil from imposing WHT on payments to Spanish graylisted entities?

Since the payments remunerate technical services, RFB would claim that these are qualified as "royalties" pursuant to Interpretive Declaratory Act RFB 05/2014, and therefore may be taxed in Brazil. Future court cases in STJ and STF will assess whether Article 7th of the Treaty would apply in this case, to prevent WHT at source, irrespective of the qualification of payments for technical services as royalties in Item 5 of the Protocol.

The other issue in the interplay between the Treaty and the graylisted regime is whether the graylist could be regarded as a "treaty override", because Article 24 of the Treaty requires Contracting States to not treat the nationals/residents of the other Contracting State in a less favorable manner than their own. This issue is further exacerbated by Interpretive Declaratory Act SRF 06, published on June 11, 2002, which says that the exemption for dividends paid by a Spanish company is not applicable to dividends paid by a Spanish ETVE.

One could certainly argue that Brazil may be disrespecting Article 24 of the Treaty in its enactment of a graylisted regime for Spain. As a matter of fact, the enactment of graylisted regimes in treaty partners could be seen as a mechanism adopted by Brazil to "amend" the text of treaties without actually having to rely on a bilateral agreement.

  • Interaction with Brazilian CFC rules

In 2013, a binding decision issued by the Federal Supreme Court ("STF") in ADI 2588/DF defined that Brazilian CFC rules could apply to controlled foreign companies in blacklisted jurisdictions ("tax havens") and could not apply to affiliated foreign companies out of blacklisted jurisdictions.

Among the questions not answered by STF in the 2013 decision is whether controlled foreign companies in Treaty countries would be exempt from CFC rules. Decisions issued by STJ and by the Administrative Court of Tax Appeals ("CARF") have already dealt with this subject, mostly in favor of the taxpayers, but STF is yet to confirm that position from a constitutional perspective.

While STF does not issue a final ruling on this subject, Brazilian tax authorities rely on references in the text of treaties (or the absence thereof) to impose CFC rules. The Treaty with Spain specifically exempts dividends received by a Brazilian company (if the payor is not an ETVE) in Article 23, paragraph 4. Though some precedents of CARF attempt to draw a line between "dividends" and "undistributed profits", this distinction has not found its way into the case law of STJ and/or STF. As a consequence, the terms of this Treaty may be used by Brazilian companies to support the non-application of CFC rules for the profits of Spanish controlled entities.

Administrative and judicial case law

A number of CARF and STJ precedents have applied the Treaty to date (STF has not issued any decisions on the terms of the Treaty with Spain). Please find a detailed list of these decisions below:

  • CARF

In Ruling 1302-001.620, the Brazilian entity claimed that the interest on Austrian and Spanish Government bonds should not be taxable by CSLL in Brazil, because both treaties establish that this type of interest is only subject to tax in the Contracting State of source. The Third Chamber of the First Section of CARF denied the application of both treaties to CSLL, stating that this particular tax has not been included in their text.11 However, in Ruling 1401-001.037, after the analysis of a similar case, the Fourth Chamber of the First Section applied the two treaties to CSLL, stating that this tax has the same taxable basis of IRPJ, and should therefore receive the same treatment.12

Although this debate has prompted heated sessions in CARF until 2015, as we mentioned above, since December 09, 2015, CSLL is applicable to all Brazilian tax treaties currently in effect.

Ruling 101-95.802, issued by the Federal Taxpayers' Council ("CC", the predecessor of CARF), is the famous Eagle I case. In Eagle I, the Brazilian taxpayer was assessed for unpaid IRPJ and CSLL because it did not include in its corresponding tax returns the profits earned by its Spanish subsidiary. The taxpayer claimed that Article 7th of the Treaty with Spain would apply in this case, effectively preventing the application of Brazilian CFC rules. CARF stated that (i) undistributed profits are not equivalent to dividends, and are not subject to IRPJ in Brazil by virtue of Article 7th, and (ii) even if one interprets undistributed profits as dividends, Article 23, paragraph 4 would prevent any imposition of IRPJ on them. CARF also applied this rationale to CSLL, stating that Article 2nd, paragraph 4 of the Treaty applies its benefits to any taxes "equal or substantially similar" to the taxes covered (IRPJ among them).13

One of the other famous cases from CC involving the application of the Treaty with Spain is Eagle II. In Ruling 101-97.070, the CC had to decide whether the indirect profits of entities in Uruguay and Argentina should be subject to CFC rules in Brazil, considering that (i) the application of CFC rules to indirect subsidiaries is debatable under domestic law, and that (ii) the profits of indirect subsidiaries should be regarded as consolidated in the direct subsidiary of the Brazilian entity (in this case, a Spanish holding). The CC concluded that (i) the CFC rules are applicable to indirect subsidiaries, and that (ii) though the Treaty can be used to prevent CFC taxation on profits directly earned by a Spanish entity, that protection does not encompass its foreign subsidiaries.14

The earliest famous case involving the application of the Treaty with Spain to date is the Refratec case. In Ruling 108-08.765, the CC had to analyze the application of CFC rules to subsidiaries in Portugal (at the time, not a treaty partner) and Spain. In what can only be described as a superficial assessment of the Treaty with Spain, the CC stated that (i) CFC rules are applicable to dividends, not to undistributed profits (as we have seen above, this position would be modified years later), and (ii) Article 10 of the Treaty, even if coupled with Article 23, is unable to prevent application of the CFC rules on profits earned by Spanish subsidiaries.15

Finally, in Rulings 107-07.44716 and 107-07.448,17 the CC stated that a Brazilian taxpayer is unable to carry forward the tax credits earned in operations with Spanish counterparts. In accordance with the decision of the CC, the purpose of the Treaty is to prevent double taxation of income, and if the specific income stream in question was not taxed twice, no extra credit would be available to a Brazilian taxpayer in future periods.

  • STJ

There is one landmark decision of STJ applying the Treaty with Spain, and it deals specifically with the imposition of WHT on the cross-border remuneration for services rendered. In REsp 1272897/PE, the First Chamber of STJ confirmed a position previously applied by the Second Chamber in REsp 1161467/RS (see above) and denied the imposition of WHT on payments for services to a company in Spain. The interesting feature of this case is the fact that, although the services in question were deemed by RFB as non-technical services (and therefore theoretically not subject to Article 12 by virtue of item 5 of the Protocol), this issue was not analyzed by STJ at all. In other words, STJ did not apply Article 7th of the Treaty because the services were non-technical – it applied Article 7th because the earnings were "business profits".18

BEPS highlights

Both Spain and Brazil (respectively a member and an associate country of the OECD) have actively participated in the drafting of the final reports for the 15 Actions of the Base Erosion and Profit Shifting ("BEPS") project. The two countries have distinct tax systems and tax treaty networks, but the OECD expects that both of them, as well as the entire G20 community, are able to implement BEPS proposals in a consistent and seamless manner.

Among the BEPS aspects associated with the application of the Treaty between Brazil and Spain, we would like to highlight the following:

  • Hybrid Mismatches (Action 2)

The OECD proposals on treaty issues associated with hybrid mismatches are mainly focused on two separate areas: (i) treaty residence of dual-resident entities; and (ii) a clarification of the entitlement to benefits of transparent entities.

According to the OECD,19 tax authorities should be able to decide, on a case-by-case basis, the State of residence of so-called dual-resident entities (entities that either by virtue of treaty provisions, domestic law, or a combination of both, are regarded as resident in two separate jurisdictions). If tax authorities are not able to reach an agreement, the taxpayer would not be entitled to any treaty benefit (except for the ones agreed upon by competent authorities of both States).

In the Treaty between Brazil and Spain, the clause that would have to be modified (or overridden) for this proposal to become effective is Article 4th, paragraph 3, which currently establishes that dual-residency issues will be resolved in favor of the State in which the legal entity has its place of effective management.

Also, according to the OECD,20 "income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State" should be regarded as "income of a resident of a Contracting State", but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.

The inclusion of this proposal in Article 1st of the Treaty between Brazil and Spain (possibly through a Multilateral Instrument) would affect not only WHT reductions (which could be partially denied if the person ultimately receiving the income is not a resident from Spain), but also the entitlement to tax sparing credits, established in Article 23, paragraph 4, as explained earlier.21

  • Entitlement to Treaty Benefits (Action 6)

The final report of Action 6 recommends the adoption of an "Entitlement to Benefits" clause, inspired by the Limitation on Benefits clause present in the United States Model Income Tax Convention.22

The purpose of the new "Entitlement to Benefits" clause would be to prevent granting treaty benefits to persons that should not be entitled to them, either because doing so is not in the interest of either Contracting State, or because the relevant taxpayer has employed a structure completely devoid of economic substance for the sole or main purpose of enjoying protection under the treaty. The proposed clause is divided into a set of objective and subjective criteria (the "principal purpose test", or PPT section), and if its text is included in the Multilateral Instrument of Action 15, taxpayers wishing to enjoy treaty benefits must comply with both criteria.23

At this stage, it is difficult to forecast whether Brazil will sign up or not for a Multilateral Instrument containing this proposed clause. Remember that the majority of Brazilian treaties either (i) do not have a Limitation on Benefits clause, but do mention the expression "beneficial owner" or "beneficiary", or (ii) have a Limitation on Benefits clause that is significantly broader than the already quite broad proposal issued by the OECD. Would Brazil be willing to relinquish its all-encompassing interpretive power of "beneficial ownership" in favor of a streamlined clause that would supersede provisions in all of its existing treaties? As implementation of BEPS proposals goes on, Brazilian policymakers will be compelled to provide a clear answer to this question.

  • Effectiveness of Dispute Resolution Mechanisms (Action 14)

The OECD has proposed a number of adjustments not only to the text of Article 25 of tax treaties in existence, but to the application of its terms by Contracting States around the world. According to the OECD, a minimum standard for Dispute Resolutions would include (i) a commitment to the timely resolution of treaty disputes,24 (ii) the publication of decisions on treaty issues for the benefit of taxpayers,25 and (iii) a commitment to mandatory arbitration (which, admittedly, is not a consensus among G20 countries).26

Article 25 of the Treaty with Spain is, in general terms, a feature of the totality of tax treaties signed by Brazil. It does not compel Brazilian tax authorities to reach a decision on the claim presented by the taxpayer, nor does it require that this resolution, if reached, is communicated in a timely fashion. Brazilian tax practice with Dispute Resolution Mechanisms is virtually non-existent: anecdotal evidence points to either a blatant disregard for requests for the application of Article 25 or to formal communications stating that the position of Brazilian Law is not subject to debate before treaty partners. Implementation of BEPS, therefore, will possibly show whether Brazil is willing to modify its historical position of indifference or deficient application of Article 25.


1 See Article 2nd, item VIII, of Normative Instruction RFB 1,037/2010

2 See Article 1st of Interpretive Declaratory Act SRF 06/2002.

3 See Article 23, paragraph 4, of the Treaty. See also item IX of Ordinance MF 45/1976.

4 See Article 1st of Interpretive Declaratory Act SRF 04/2006.

5 See Article 10 of Law 9,249/1995.

6 See Article 28 of Law 9,249/1995.

7 See Article 2nd, items I and II, of Interpretive Declaratory Act SRF 04/2006.

8 See Article 3rd of Provisional Measure 2,159-70/2001.

9 See Article 685, item I, of Decree 3,000/1999 (Income Tax Regulations, or "RIR/99"). See also Article 21 of Normative Instruction RFB 1,455/2014.

10 See Article 18 of Law 12,249/2010. See also Article 15 of Normative Instruction RFB 1,455/2014.

11 See CARF. Ruling 1302-001.620. First Section, Third Chamber, Second Ordinary Group. Session of February 03, 2015. Published on February 13, 2015.

12 See CARF. Ruling 1401-001.037. First Section, Fourth Chamber, First Ordinary Group. Session of September 10, 2013. Published on January 07, 2014.

13 See CC. Ruling 101-95.802. First Council, First Chamber. Session of October 19, 2006. Published on October 19, 2006.

14 See CC. Ruling 101-97.070. First Council, First Chamber. Session of December 17, 2008. Published on December 17, 2008.

15 See CC. Ruling 108-08.765. First Council, Eighth Chamber. Session of March 23, 2006. Published on March 23, 2006.

16 See CC. Ruling 107-07.447. First Council, Seventh Chamber. Session of December 03, 2003. Published on December 03, 2003.

17 See CC. Ruling 107-07.448. First Council, Seventh Chamber. Session of December 03, 2003. Published on December 03, 2003.

18 See STJ. REsp 1272897/PE. First Chamber, Rapp. Min. Napoleão Nunes Maia Filho. Session of November 19, 2015. Published on December 09, 2015.

19 OECD. Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 – 2015 Final Report. OECD/G20 Base Erosion and Profit Shifting project. OECD: 2015, pp. 137-138. Available at:.

20 See note 19 above. OECD: 2015, pp. 139-143.

21 The final report provides an example that illustrates the interplay between hybrid mismatch rules and a tax sparing clause, such as the one in the Treaty between Brazil and Spain, in the proposed item 26.7 to the OECD Commentary: "[Brazil] and [Spain] have concluded a treaty identical to the Model Tax Convention. [Brazil] considers that an entity established in [Spain] is a company and taxes that entity on interest that it receives from a debtor resident in [Brazil]. Under the domestic law of [Spain], however, the entity is treated as a partnership and the two members in that entity, who share equally all its income, are each taxed on half of the interest. One of the members is a resident of [Spain] and the other one is a resident of a country with which [Brazil] and [Spain] do not have a treaty. The paragraph provides that in such case, half of the interest shall be considered, for the purposes of Article 11, to be income of a resident of [Spain]." In this example, only half of the interest received would be associated with a tax sparing credit of 20%, in line with Article 23, paragraph 2, of the Treaty.

22 OECD. Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report. OECD/G20 Base Erosion and Profit Shifting project. OECD: 2015, p. 11. Available at:

23 See note 22 above. OECD: 2015, pp. 21-69.

24 OECD. Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report. OECD/G20 Base Erosion and Profit Shifting project. OECD: 2015, pp. 15-16. Available at: .

25 See note 24 above. OECD: 2015, p. 17.

26 See note 24 above. OECD: 2015, p. 41.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.