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Brazil’s expansion of its Double Taxation Agreement Network – The Inclusion of Singapore, Switzerland and the United Arab Emirates

 

Double Taxation Agreeents (DTA) have as their main purpose to establish criteria for the apportionment of revenue among contracting countries. As a consequence, DTAs are one of the most relevant tools to avoid double taxation of income between contracting countries by restricting the tax jurisdiction of contracting States when the occurrence of certain situations and income involving its residents and, at the same time these agreements promote legal certainty between the contracting countries, they prevent tax evasion and are an effective tool in combating abusive tax planning.

Currently, Brazil has 33 treaties in force and is moving towards a broader list of agreements, considering the recently approved DTAs with Singapore, Switzerland and the United Arab Emirates. Even though most of the DTAs signed by Brazil follow standard clauses, each agreement may be different, and these three recent DTAs provide for some aspects that deserve some clarification.

In general, on its other DTAs, Brazil treats technical services and technical assistance as royalties, withholding income tax at the source. Further, until recently, Brazil had not included the definition of “technical services” in DTAs or in the law, which created legal uncertainty and qualified most services as technical services.

In addition, some problems could arise from the treatment that Brazil gives to technical services: 1) The tax withheld at the Brazilian source is considered high (rate of 15%), being specially relevant to the operation if the service provider has high costs; 2) Even though the tax withheld can become a credit in the other country, if the service provider does not have enough net profit to absorb the tax withheld abroad, this non-creditable part of the tax withheld will likely become an additional cost to the service provider; and 3) It is common for the country of residence of the service provider to deny the tax credit, disagreeing with the treatment given by Brazil to such “royalties”.

Thus, a relevant alteration presented by the agreements recently signed is the creation of a specific clause regarding remuneration of technical services. Remuneration for technical services is defined in Article 13 of the Agreements as payment for any service of a managerial, technical or consultancy nature, except for the payment made to an employee of the person making the payment; by virtue of teaching at an educational institution or by teaching service provided by an educational institution; or by an individual for services of an individual’s personal use.

As for the taxation itself, the agreement determines that the remuneration for technical services may be taxed both at the source or at the destination. However, when taxed at the source, the rate applicable is 10% for payments to beneficiaries in Switzerland or Singapore, and 15% for payments to beneficiaries in the United Arab Emirates.

This provision seeks to clarify the controversy involving the remuneration for technical services, which had been classified in articles 7 of the Agreements, that deal with company profits, without being subject to the Withholding Income Tax (Imposto de Renda Retido na Fonte), except in the case of equivalence between technical services and royalties, provided for in several agreements.

Therefore, this new text shall provide more certainty to the taxation of technical services and remedy the issues that could arise from treating technical services as royalties or company profits, like Brazil’s previous practice. Moreover, even though the tax rate for beneficiaries in the UAE is the same applicable for royalties (i.e., 15%), which may not seem like a big advantage, the adoption of an article specifically for technical services reduces the risk of the taxpayer not being able to get the tax credit in the other country.

Another important aspect is that the new agreements have a clause that determines the limitation of the benefits provided for in the agreement if it is reasonable to conclude that obtaining these benefits was one of the main objectives of the transaction. This clause specifically seeks to prevent taxpayers from using artificial structures in order to obtain greater tax savings due precisely to the use of the agreement. Therefore, it is possible to infer that this is one of the most important additions to the agreements because of its impact on abusive tax planning.

Apparently, Brazil is following the global trend of developed countries to limit the abuse of double taxation conventions, curbing treaty shopping and treaty abuse. The inclusion of benefit limitation clauses in agreements against double taxation is a recent practice, of less than two decades on the international stage. Nevertheless, it is a repeated practice that is part of the negotiation policy of agreements signed by countries such as the USA, Canada, the United Kingdom and several countries in the European Union. Brazil has first adopted a clause like this in 2001, in the DTA signed with Chile.

Further, an article that deserves attention is Article 2, which determines which tax are under the scope o the DTAs. One of the objectives of this article is to broaden the field of application of DTAs as much as possible, avoiding the need for a new negotiation each time the domestic legislation is changed. However, the tax named CSLL in Brazil was always a topic of controversy, because of its similarity with other income tax. Nevertheless, article 2 of the DTAs recently approved, subject CSLL, along with the Income Tax, to the scope of the agreements.

The DTAs also allow for the application of the rules on the basis of equivalence. Income from the provision of technical assistance services is equivalent to royalties, therefore subject to article 12; and interest paid on equity, in accordance with the Brazilian tax legislation, is equivalent to interest and subject to the rules of article 11.

Finally, if Brazil adopts with any other country that is a member of the Organization for Economic Cooperation and Development (OECD) tax rates lower than those provided for interests, these rates will also apply to these Agreements.

 

To summarize, the table below includes the rates applicable under the agreements:

Type of IncomeSwitzerlandSingaporeUnited Arab Emirates
Dividends10% of the gross amount of dividends, if the beneficial owner is a company (other than a partnership) that directly holds at least 10 per cent of the capital of the company paying the dividends; or

 

15% of the gross dividend amount in all other cases

10% of the gross dividend amount, if the beneficial owner is a company (other than a partnership) that directly holds at least 25 percent of the capital of paying the dividends; or

 

15% of the gross dividend amount in all other cases

5% of the gross dividend amount, if the beneficial owner is a Contracting State, any of its political subdivisions or local governments or a government institution; or

 

15% of the gross amount of dividends in all other cases.

Interest10% of the gross amount of interest if the beneficial owner is a bank and the loan was granted for at least five years to finance the purchase of equipment or investment projects; or

 

15% of the gross amount of interest in all other cases.

10% of the gross amount of interest if the beneficial owner is a bank and the loan was granted for at least five years to finance the purchase of equipment or investment projects; or

 

15% of the gross amount of interest in all other cases.

10% of the gross amount of interest if the beneficial owner is a bank and the loan was granted for at least five years to finance the purchase of equipment or investment projects; or

 

15% of the gross amount of interest in all other cases.

Royalties15% of the gross amount of royalties from the use, or right to use, of industry or trademarks;

 

10% of the gross amount of royalties in all other cases.

15% of the gross amount of royalties from the use, or right to use, of industry or trademarks; or

 

10% of the gross amount of royalties in all other cases.

15% of the gross amount of royalties.
Technical Services10% of the gross amount of the remuneration10% of the gross amount of the remuneration15% of the gross amount of the remuneration

 

The Brazilian tax system is complex and full of caveats, but at the same time the Brazilian market is full of opportunities for foreign investment. The existence of these agreements is a fundamental piece when looking for a place to invest, they present legal security, taxation certainty and the avoidance of being taxed twice. The RMSA team has an extensive experience when counseling residents of countries that Brazil has DTAs in force, securing and facilitating business opportunities for foreign investors is one of our areas of expertise. We put ourselves available to answer any question that may arise from this topic or any other.

 

Isabella K. Pimentel

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