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March 8, 2021
2021-5270

Brazilian Senate approves three new treaties for the avoidance of double taxation

The new treaties improve the Brazilian business environment by facilitating investments from Switzerland, Singapore and the United Arab Emirates (UAE) into the largest economy in Latin America, and vice versa.

On 25 February 2021, the Brazilian Senate approved three new treaties for the elimination of double taxation and the prevention of tax evasion and avoidance (the Treaties) between Brazil and Switzerland, Singapore and the UAE.

The Treaties are now pending enactment by the President’s sanction. Provided that the enactment and final notification to the Swiss and UAE governments are concluded in 2021, the Treaties will apply beginning 1 January 2022. The treaty with Singapore still needs to be approved by the Singaporean Congress.

The Treaties’ provisions are partially aligned with the standards of the Organisation for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting (BEPS) action plans.

Certain regimes in Switzerland and Singapore are considered privileged tax regimes under Brazilian domestic legislation. Brazilian domestic legislation considers the UAE to be a low-tax jurisdiction. Therefore, a possible conflict may arise between the applicability of treaty provisions and Brazil’s domestic legislation. Multinational groups doing business in Brazil should review their current situation to evaluate if any actions are needed to qualify for treaty benefits.

The following table summarizes the key aspects of the Treaties:

 

Brazil- Switzerland

Brazil-Singapore

Brazil-UAE

Persons covered

Applies only to persons resident in the Contracting States

Limits the use of transparent entities to unduly obtain treaty benefits

Treats certain collective investment vehicles from both Contracting States as individuals for treaty purposes

Applies only to persons resident in the Contracting States

Limits the use of transparent entities to unduly obtain treaty benefits

Applies only to persons resident in the Contracting States

Limits the use of transparent entities to unduly obtain treaty benefits

Taxes covered

Income taxes of both Contracting States, including CSLL1

Income taxes of both Contracting States, including CSLL

Income taxes of both Contracting States, including CSLL

Residence

Effective place of management as tie-breaker rule

Effective place of management as tie-breaker rule

Entities resident in both Contracting States do not qualify as residents for treaty purposes

Dividends2 - maximum withholding tax (WHT) rate

10%3/15%

Allows only the Contracting State when a pension or sovereign fund is resident to tax dividends paid to the fund

10%2/15%

5%2/15%

Interest - maximum WHT rate

10%2/15%

Treats interest on net equity (INE) as an interest payment for treaty purposes 

Allows only the Contracting State when a pension or sovereign fund is resident to tax interest paid to the fund

10%2/15%

Treats INE as an interest payment for treaty purposes

10%2/15%

Treats INE as an interest payment for treaty purposes

Royalties - maximum WHT rate

Generally 10%, including technical assistance

15% for use of trademark

Generally 10%, including technical assistance

15% for use of trademark

15%, including technical assistance

Technical services - maximum WHT rate

10%

10%

15%

Capital gains

Allows only the source State to tax sales of shares without limitation

Allows only the source State to tax sales of shares without limitation

Allows only the source State to tax sales of shares without limitation

Most favorable nation clause

Applies to interest, royalties and technical services if most favorable treatment is agreed by Brazil in a treaty with another country that is an OECD member

Applies to interest if most favorable treatment is agreed by Brazil in a treaty with another country (outside of Latin America)

N/A

Elimination of double taxation

Entitles Brazilian residents to a deduction of tax credits for taxes paid in Switzerland

Exempts Brazilian-sourced income received by Swiss residents that is taxable in Brazil under the treaty from tax in Switzerland

Allows a deduction in Switzerland for taxes paid on dividends, royalties, interest and technical service income in Brazil

Entitles Brazilian residents to a deduction of tax credits for taxes paid in Singapore

Entitles Singaporean residents to a tax credit for taxes paid in Brazil

Allows a credit for Brazilian tax paid on dividend income derived by a Singaporean resident company that directly or indirectly owns at least 10% of the share capital of the Brazilian resident company paying the dividends (the credit is calculated based on the Brazilian corporate income tax paid by the Brazilian resident company on the portion of its profits out of which dividends are paid, not a tax on dividends as Brazil does not tax dividends.)

Entitles residents in both Contracting States to a deduction of tax credits for taxes paid in the other Contracting State

Grants “tax sparing” to UAE residents that receive dividend income from Brazilian residents that are entitled to certain income tax benefits (tax sparing related to the underlying corporate income tax due in Brazil)

Mutual Agreement Procedures (MAP)

Gives taxpayers three years to seek competent authorities

Gives taxpayers three years to seek competent authorities

Gives taxpayers three years to seek competent authorities

Entitlement to treaty benefits

N/A

Simplified limitation of benefits (LOB) and principal purpose test (PPT)

PPT and additional limitations for income derived from certain activities performed in the UAE, if subject to low/no taxation in the UAE

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young Assessoria Empresarial Ltda, São Paulo

Ernst & Young Assessoria Empresarial Ltda, Rio de Janeiro

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

________________________________________

Endnotes

  1. Contribuição Social Sobre o Lucro Líquido (CSLL) (Social Contribution on Net Profits)

  2. Dividends are currently exempt in Brazil under domestic legislation.

  3. Provided that certain conditions are met.

 
 

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