Ipso Facto Law

What gives businesses the confidence to invest across borders?

Many people would answer lower tax rates, access to new markets, or favorable economic policies. While these factors certainly matter, there is another element that is just as important, yet often receives far less attention.

That element is legal certainty.

Businesses and investors do not simply seek attractive tax regimes; they seek predictability. They need to know that the rules governing their investments will be interpreted consistently, applied fairly, and remain sufficiently stable to allow for long-term planning.

In today’s increasingly interconnected economy, legal certainty has become one of the essential foundations of economic growth, investment, and European competitiveness.

This is particularly true for the European Union.

The Single Market has been one of the European Union’s greatest achievements. It has removed barriers to trade, facilitated the free movement of people, goods, services, and capital, and created one of the largest integrated markets in the world.

Yet integration is not achieved through economics alone.

It also depends upon confidence in the legal system.

Whenever businesses operate across borders, they encounter multiple legal systems, each with its own constitutional principles, domestic legislation, and judicial interpretations.

When those legal systems produce inconsistent outcomes, uncertainty inevitably follows.

That uncertainty increases compliance costs, discourages investment, and weakens the effectiveness of the Single Market itself.

One area where these challenges become particularly evident is international taxation.

Double Taxation Conventions play a fundamental role in preventing the same income from being taxed twice, allocating taxing rights between States, and facilitating international investment.

However, an important question remains:

What happens when domestic legislation appears to conflict with an international tax treaty?

The answer is not uniform throughout Europe.

Different Member States have adopted different constitutional approaches regarding the relationship between domestic legislation and international treaties.

Germany provides perhaps the best-known example of what is commonly referred to as a treaty override. Under certain circumstances, a later domestic statute may prevail over an earlier international treaty.

Spain, however, follows a different approach.

Under Article 31 of Law 25/2014, duly concluded and officially published international treaties become part of the Spanish legal order and may not be modified or repealed by ordinary domestic legislation except in accordance with international law.

This reflects broader principles established under the Vienna Convention on the Law of Treaties.

Article 26 embodies the principle of pacta sunt servanda—that treaties must be performed in good faith.

Article 27 further provides that a State may not invoke its internal law as justification for failing to comply with its treaty obligations.

Together, these principles reinforce legal certainty by ensuring that international commitments are respected and consistently applied.

The practical importance of these principles can be seen in a recent case before the Spanish Supreme Court.

On June 24, 2026, the Court admitted an appeal in cassation concerning the classification of Juros sobre o Capital Próprio, commonly known as JSCP, under the Double Taxation Convention between Spain and Brazil.

At first glance, this may appear to be a highly technical tax dispute.

In reality, however, it raises much broader questions regarding treaty interpretation, legal certainty, and the relationship between domestic and international law.

The dispute concerns a taxpayer resident in Spain who received JSCP payments from a Brazilian company.

Three fundamental legal issues arise.

First, should JSCP be classified as dividends or as interest under the Convention?

Second, which State possesses the right to tax this income?

And third, what mechanism should be used to eliminate international double taxation?

The Spanish Tax Administration argued that these payments should be treated as interest because Brazilian law allows the distributing company to deduct them as a business expense. It acts like interest and should not benefit from Spain’s dividend exemption.

Under amendments introduced into the Spanish Corporate Income Tax Law in 2025, that interpretation would prevent taxpayers from benefiting from the participation exemption that generally applies to qualifying foreign dividends.

The Supreme Court, however, approached the issue from a different perspective.

Rather than focusing exclusively on Brazilian domestic law, the Court emphasized that the Convention itself must be interpreted according to the rules established in the Vienna Convention on the Law of Treaties.

In other words, the characterization of income for treaty purposes should derive from the Convention—not solely from domestic tax classifications.

Should this interpretation ultimately prevail, JSCP would be treated as dividends under the Spain–Brazil Double Taxation Convention, allowing taxpayers access to the treaty’s mechanism for eliminating double taxation.

The significance of this case extends far beyond one taxpayer or one bilateral treaty.

It illustrates how consistent treaty interpretation contributes directly to legal certainty.

When courts provide clear and predictable interpretations of international agreements, businesses gain confidence.

Investors can structure transactions with greater certainty.

Compliance becomes simpler.

Cross-border investment becomes less risky.

In this sense, legal certainty functions as an economic asset.

It promotes investment, supports international trade, and enhances the attractiveness of the European market.

Looking ahead, although tax harmonization remains limited within the European Union, greater convergence in the interpretation and application of Double Taxation Conventions would significantly strengthen legal certainty across the Union.

Such convergence would reduce legal fragmentation, lower compliance costs, facilitate cross-border investment, and reinforce mutual confidence among Member States.

In an era of increasing geopolitical uncertainty and global economic competition, the European Union’s competitiveness depends not only upon fiscal policy or market size.

It also depends upon the credibility and consistency of its legal framework.

Legal certainty is therefore much more than a technical principle of international tax law.

It is a strategic asset.

It supports investment.

It strengthens the rule of law.

It reinforces trust between States.

And ultimately, it contributes to the continued consolidation of the European Single Market.