11.22. General aspects of treaties for the avoidance of double taxation
Brazil has signed double taxation treaties (“DTT”) with several countries to facilitate international capital flows. Generally speaking, DTT’s goal is to prevent legal double taxation of income through the restriction of contracting states’ taxation powers in certain situations and regarding certain types of income earned by their residents, or through the granting of a credit on taxes paid abroad—the latter being the method chosen by Brazil to mitigate double taxation. DTT can also limit withholding tax rates, and they often contain rules to determine a person’s place of residence in case of conflict between both states.
11.22.1. Primacy of DTT over domestic law
In the Brazilian legal system, the primacy of DTT over domestic law can be construed through the combination of articles 5(2) and 150 of the Constitution. Article 2(5) states that domestic law must uphold fundamental guarantees and human rights set forth in international treaties signed by Brazil. Article 150, which limits the government’s taxation powers, treats taxation as a fundamental right. Additionally, article 98 of the National Tax Code (“CTN”) expressly states that international treaties and conventions on tax matters overrule domestic law. Rulings by both the Brazilian Supreme Court and the Superior Court of Justice discussing CTN article 98 recognize the primacy of DTT over domestic law.
Therefore, domestic law is bound by DTT, and the latter derogate the former in case of conflict.
11.22.2. Taxes covered by DTT
In Brazil, federal corporate taxation is composed by the following taxes: (i) Tax on Natural Persons’ Income (“IRPF”); (ii) Corporate Income Tax (“IRPJ”), levied on corporate taxable profits; and (iii) Social Contribution on Net Profits (“CSLL”), which is essentially the same as IRPJ, but with small changes to the taxable basis.
IRPF and IRPJ expressly covered in all DTT. CSLL, however, may be not expressly covered by these agreements, because it was enacted years after most Brazilian DTT came into force. For many years, practitioners discussed whether CSLL was covered by treaties where it was not expressly mentioned, given its substantial similarity to IRPJ and the rule found on Article 2(2) of DTT signed by Brazil, which guarantees the applicability of their benefits to substantially similar taxes—such as DTT, which is substantially similar to IRPJ.
The controversy was solved by Law no. 13.202/15 article 11, which stated, for interpretative purposes (and, therefore, with retroactive effects), that the DTT applies to CSLL.
There is a consensus that DTT do not apply to other taxes levied on gross revenue (PIS and COFINS) and on remittances (CIDE-Royalties). However, there are scholars who maintain DTT should apply to CIDE-Royalties.
11.22.3. DTT signed by Brazil
The following countries are parties to DTT signed with Brazil that are currently in force: Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Norway, Peru, the Philippines, Portugal, Russia, Slovakia, South Africa, South Korea, Spain, Sweden, Trinidad and Tobago, Ukraine, and Venezuela.
Brazil has also concluded treaties with Paraguay, Singapore, and Switzerland, all currently awaiting congressional approval.
11.22.4. Brazil–Switzerland DTT
The treaty is not yet in force. It has been approved by the Chamber of Deputies, but it is still pending approval by the Senate since March 2020.
The Brazil–Switzerland DTT incorporates the OECD’s Model Convention clauses and includes clauses aimed at protecting against “treaty abuse,” which are a part of the Base Erosion and Profit Shifting program Action 6. Among the most relevant provisions of the Brazil–Switzerland DTT are:
The DTT sets a 10% limit on the withholding tax rate levied on dividends paid by a company which is a resident of one state to a resident of the other state which holds directly at least 10% of the capital of the company paying the dividends throughout a 365-day period. Otherwise, the maximum applicable withholding tax rate is 15%.
The DTT sets a 10% limit on the withholding tax rate levied on interest paid by a resident of one state to a bank residing in the other state, if the loan was granted for at least five years for the financing of the purchase of equipment or of investment projects. Otherwise, the maximum applicable withholding tax rate is 15%.
The DTT sets a 15% limit on the withholding tax rate levied on royalties paid by a resident of one state to a beneficiary residing in the other state if they arise from the use or the right to use trademarks. Otherwise, the maximum applicable withholding tax rate is 10%.
The DTT contains a provision concerning specifically the taxation of fees for technical services (Article 13), thereby excluding the rules concerning profits (Article 7) and royalties (Article 12). The term “fees for technical services,” as used in the article, means any payment in consideration for any service of a managerial, technical, or consultancy nature, with certain exceptions. The source state may levy a 10% withholding tax if the beneficiary of the fees resides in the other contracting state.
Persons covered and applicability to public entities
For the first time in the history of DTT signed by Brazil, the convention states that income derived 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, but only to the extent that the income is treated as the income of a resident of that state. This means that the agreement accepts these entities as covered persons. The agreement also expressly includes under the term “resident of a Contracting State” pension funds, and organizations established for religious, charitable, scientific, cultural, sporting, or educational purposes in either state.
Express mention of CSLL
The Brazil–Switzerland DTT expressly includes CSLL in the list of taxes covered.
The DTT also provides for the exchange of information deemed relevant for carrying out the provisions of the convention or to the administration and enforcement of the domestic laws of the contracting states concerning taxes covered thereby.
The DTT contains a limitation of benefits (“LOB”) clause (Article 27), pursuant to which a benefit under the convention shall not be granted if obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted in the application of the benefit under the DTT.
Article 27(2) states that tax rate limitation benefits do not apply if either contracting state does not tax, or taxes at a rate which is lower than 60% of the rate which is applied to income from similar onshore activities, offshore income derived by a company from (i) shipping; (ii) banking, financing, insurance, investment, or similar activities; and (iii) being the headquarter, coordination center, or similar entity providing administrative services or other support to a group of companies which carry on business primarily in third states.
Article 27(3) states the DTT does not apply to entities in which more than 50% of the beneficial interest is owned, directly or indirectly, by persons that are not residents in either contracting state. This rule does not apply if that entity has its principal class of shares regularly traded on a recognized stock exchange, or carries out, in its country of residence, a substantive business activity, other than the mere holding of securities or assets, or the mere performance of auxiliary, preparatory, or any other similar activities in respect of other related entities.
Finally, Article 27(4) limits the application of treaty benefits where a permanent establishment is used to abuse its rules.
11.22.5. Information exchange treaties signed by Brazil
Brazil has signed multilateral and bilateral agreements to exchange financial and tax information. In 2011, Brazil signed the Convention on Mutual Administrative Assistance in Tax Matters, to facilitate the exchange of tax information and documents, and to encourage cooperation as may be relevant for the administration or enforcement of domestic tax law. The convention was approved by the Congress in April 2016, ratified in June 2016, and entered into force in October 2016. Based on this agreement, Brazil pledged to uphold international automatic information exchange standards.
Bilateral agreements entered into with Argentina, Jersey, Switzerland, the United Kingdom, and the United States are currently in force. Agreements entered into with other jurisdictions are not yet in force while internal procedures required by domestic laws of both parties are still pending.
Information exchange between Brazil and the United States
Brazil signed an Agreement for the Exchange of Information Relating to Taxes (“TIEA”) and the Agreement to Improve International Tax Compliance and to Implement FATCA (“IGA”). The TIEA, which has been in force since March 19, 2013, with the scope of exchange providing mutual assistance through the exchange of information that may be relevant to the administration and enforcement of the domestic laws of both parties, including information that may be relevant to the determination, assessment, enforcement or collection of tax, or to the investigation or prosecution of criminal tax matters. The IGA, signed on September 23, 2014, authorizes the automatic exchange of information between American and Brazilian tax authorities with respect to accounts held by nationals or residents of either state maintained in the other state.
Information exchange between Brazil and Switzerland
On November 23, 2015, Brazil and Switzerland signed an Agreement Regarding the Exchange of Information in Tax Matters, which provides for the exchange of financial and tax information between tax authorities of both countries. Pursuant to the agreement, a specific request is required, but a court authorization is not necessary.
The agreement was promulgated on May 30, 2019, through Decree No. 9,814 / 2019. Thus, since January 1, 2020, Brazil and Switzerland can exchange information related to all tax obligations occurring as of January 1, 2020.
Philip Schneider and Pedro Guilherme Ferreira Bini
Schneider, Pugliese, Sztokfisz, Figueiredo e Carvalho Advogados
Rua Cincinato Braga, 340 – 9º andar
01333-010 São Paulo-SP
Tel: +55 (11) 3201 7550
Fax: +55 (11) 3201 7558
Offices in São Paulo and Brasília.
Languages: English, German, Spanish, Italian and Hebrew.
Practices: tax consulting and tax planning; judicial and administrative tax litigation.