In order to facilitate international economic activity flow, Brazil has signed double taxation treaties (“DTT”) with certain countries.In general terms, DTT aim to avoid economic double taxation of income, either by restricting the contracting States’ power to tax income derived from specific situations involving its residents, or by granting credit to tax paid in favor of the other contracting State-the latter being the method chosen by Brazil to relief doubletaxation.
In certain cases, DTT may also restrict domestic rates or even establish exemptions to certain incomes, which results in great advantage to economic relations with the other contracting State.
11.22.1. DTT prevalence over domestic legislation
The Brazilian Constitution sets forth the prevalence of DTT over domestic law, as can be inferred from the combined provisions of article 5, paragraph 2, and article 150 of the Brazilian Federal Constitution. Paragraph 2 of article 5 provides that the rights and fundamental warranties assured by the international treaties signed by Brazil cannot be excluded by internal legislation. On the other hand, article 150, which establishes limitations on power to tax, includes tax issues in the concept of fundamental rights.
From a tax perspective, article 98 of the Brazilian National Tax Code (“CTN”)expressively determines that the treaties and international conventions in tax matters prevail upon the provisions set forth in internal legislation. Thus, if Brazil celebrates a DTT with other Contracting State, the analysis of the legislation which governs international transactions involving residents of both countries should take into consideration the applicable DTT provisions.
Moreover, with respect to income tax, article 997 of the Income Tax Regulation (“RIR”), states that international treaties celebrated by the Brazilian government and duly inserted in the Brazilian legal system, prevail upon the internal legislation.
It is important to take into consideration that there are significant decisions by the Brazilian Supreme Court (“STF”) and by the Superior Court of Justice (“STJ”) that make reference to the rule set forth in CTN article 98, therefore asserting the prevalence of the DTTs over domestic legislation.
11.22.2. Taxes covered by DTTs
Brazilian legal entities are generally subject to corporate income tax in Brazil, levied upon (i) income (profits), through the Tax on Legal Entities’ Income (“IRPJ”), and the Social Contribution on Net Profits (“CSLL”); and upon (ii) revenues, through the Contribution for the Social Integration Program (“PIS”) and the Contribution for the Financing of Social Security (“COFINS”).
According to article 2 of the Model Convention of the Organization for Economic Co-operation and Development (“OECD”) 1 , TDT apply to taxes levied on “income” (paragraph 1) regardless of the system used for its collection, on the total income, or on part of it (paragraph 2). Moreover, similar or identical taxes created after the date of signature of TDT, in addition or in their replacement to the existing, are also covered by the TDT (paragraph 4).
Thus, there is no doubt that DTTs apply to IRPJ.
In relation to CSLL, it is important to consider that, in line with the provisions of article 2 of OECD’s Model Convention, the list of taxes provided in its paragraph 1 has a connotative or exemplifying nature. It foresees only taxes in force at the moment of the negotiations of the DTT and therefore there shall be no limitation to the application of the DTT to taxes created after its signature. The DTT must be clear in relation to the existing taxes in the moment of the DTT negotiation, but not limited to them: future taxes shall be covered by the DTT, as long as they meet the requirements of paragraph 2 of the same article. In other words, they must hold the identity or substantial similarity with the ones expressly provided in the text.
In this sense, article 11 of Law no. 13,202/15 sets forth that the DTT entered into by Brazil are applicable to CSLL, whose tax triggering event (income), and tax base is very similar (“profit”, with small discrepancies due to legal adjustments prescribed in the specific legislation of each tax) are substantially similar to the IRPJ’s. This treatment is also applicable to international agreements that provide for income tax exemption to air and sea navigation companies.
It should be noted that the rule set forth in article 11 is clearly interpretative, once it is preceded by the expression “for interpretative purpose”. This implies the application of CTN article 106(I), which establishes that interpretative law be applied rectroactively Thus, even if CSLL is not expressly foreseen in some of Brazil’s DTT, it should be understood that it is comprised in all DTT and treaties that provide for the taxation of air and sea navigation entered into by Brazil.
As for PIS and COFINS, these taxes are not comprised within DTTs, due to significant differences between their tax bases and what is generically considered as tax on income in the DTT (IRPJ and CSLL, as mentioned above).
11.22.3. DTTs signed by Brazil
Currently, Brazil has DTTs with the following countries:
– Czech Republic
– South Africa
– South Korea
– Trinidad and Tobago
Brazil has also signed DTTs with Paraguay (approved by Legislative Decree no. 972/03), Switzerland (concluded on May 3, 2018, pending congressional approval) and with Singapore (concluded on May 7, 2018, pending congressional approval), all awaiting ratification.
11.22.4. Brazil-Switzerland DTT
The DTT entered into between Brazil and Switzerland reflects the standard clauses of the OECD Model Convention, and contemplates so-called “anti-abuse” provisions,
as defined in the context of Base Erosion and Profit Shifting (“BEPS”) Action 6 countering program.
Among the provisions of the DTT, the following can be highlighted:
The DTT contains a specific provision concerning the taxation of technical services, which excludes the application of the article on corporate profits in certain cases. The term “fees for technical services” defines any service of a managerial, technical, or consultancy nature, with a handful of exceptions.
Regarding taxation, the DTT stipulates that payment in consideration for technical services can be taxed at the source (source State), at the rate of 10%, if the effective beneficiary of such payments is a resident in the other State (residence State).
The DTT sets forth the taxation at the source (source State), at the rate of 10%, if the effective beneficiary of dividends is a resident in the other State (residence State) and holds at least 10% of the company’s shares, for a period of at least 365 days. In any other case, a 15% withholding applies.
The DTT sets forth the taxation at the source (source State), at the rate of 10%, if the effective beneficiary of the interest payment is a bank residing in the State of the receiver (residence State), as well as if the loan was granted for the financing of equipment or investment projects for at least five years. In any other case, a 15% withholding applies.
Persons covered and applicability to public entities
The Brazil-Switzerland DTT, unlike other treaties, states that income derived by a fiscally transparent entity (such as partnerships and trusts) and by collective investment vehicles (such as investment funds) shall be considered to be income of a resident of a Contracting State. That is, the DTT includes such entities in the list of persons covered.
The DTT also expressly includes pension funds and organizations operated for religious, charitable, cultural, sport, or educational purposes, as “residents of a Contracting State.”
Provisions concerning the CSLL
The DTT expressly lists the CSLL as a covered tax, as per article 11 of Law no. 13.202/15, which states that double taxation treaties entered into by Brazil also comprise the CSLL.
The DTT provides for the Exchange of relevant information for the enforcement of the treaty or for the administration and of the internal tax laws of Contracting
Regarding royalties, there is a provision for a 15% tax at the source (source State) at if the effective beneficiary of the royalties resides in the receiving State (residence
State) and if they arise from the use, or the right to use, of industrial or commercial brands. In any other case, a 10% withholding applies.
On November 23, 2015, Brazil and Switzerland had already entered into the Agreement for the Exchange of Information on Tax Matters, which provides for the sharing of tax and financial information between the authorities of both countries. Said Agreement must be approved by the relevant powers of both countries in order to enter into force. The Agreement establishes that the exchange of information shall occur upon specific request and dismisses the need of a judicial authorization for such. The information to be exchanged is restricted to the period from January 1st of the year subsequent to the entry into force of the Agreement and are to be treated as confidential by both countries.
11.22.5. Information exchange agreements signed by Brazil
In the context of worldwide policies of integration of financial and fiscal information, Brazil has entered multilateral and bilateral agreements for the exchange of information for tax purposes with determined countries.
In 2011, Brazil signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which provides the sharing of information and tax documents, as well as cooperation in inspection procedures and assistance in recovery of tax credits between contracting States. The Convention, which was approved by the National Congress in April 2016 and ratified internationally in June of the same year, will enter into force in Brazil in October 2016. Based on such instrument, Brazil has committed to adopt international exchange of information standards, which will allow the automatic exchange of tax information as of 2018.
Brazil and the United States have signed the Tax Information Exchange Agreement (“TIEA”) and, more recently, the Agreement to Improve International Tax Compliance and to Implement FATCA (“IGA”).
The TIEA, which is in force since March 19, 2013, provides for mutual assistance on the exchange of information relevant to the administration and execution of internal tax law, including in what concerns tax assessment, levy and collection and investigation and prosecution of criminal lawsuits related to tax issues. This Agreement has been approved by Legislative Decree no. 211/13 and promulgated by Executive Decree no. 8.003/13.
The IGA, which was signed in September 23, 2014, foresees exchange of information between Brazilian and American tax authorities concerning accounts maintained by nationals or residents in Brazil or in the United States in financial institutions in the other contracting country. In Brazil, the agreement has been approved by Legislative Decree no. 146/15 and by Executive Decree no. 8.506/15.
Brazil has also entered into treaties providing for the exchange of tax information with Argentina, Bermudas, Cayman, Guernsey, Jamaica, Jersey, San Marino, the United Kingdom, and Uruguay, all of which must be approved by the Brazilian Legislative and Executive branches in order to enter into force in Brazil.
1 – Despite not being an OECD member, Brazil follows the main aspects of the Model Convention created by such international organization. Notwithstanding, in some aspects, Brazil does not follow this model and adopts its own standards.
Contacts: H. Philip Schneider, Maria Carolina Maldonado M. Kraljevic and Pedro Paulo Bresciani
Schneider, Pugliese, Sztokfisz, Figueiredo e Carvalho Advogados
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Practices: tax consulting and tax planning; judicial and administrative tax litigation.