Brazil and UK sign tax treaty
On 29 November 2022, Brazil and the UK signed a long-awaited Double Taxation Agreement (DTA). While the DTA will not enter into force until completion of the relevant legislative procedures required by Brazilian and UK law, which in Brazil requires the DTA to be approved by Congress and signed by the President, its implications are already relevant to multinationals which are, or are considering, operating in both jurisdictions. This is one of the more favorable treaties that Brazil has entered into.
When in effect, the DTA will establish the following withholding tax rates for source-country taxation on various types of income:
Dividends (Article 10):
- 10% of the gross amount of dividends paid to a company (the beneficial owner) that holds directly at least 10% of the capital of the payer company throughout a 365-day period that includes the date of the payment of the dividends.
- In all other cases, the rate will be 15%.
Currently, neither the UK nor Brazil impose a withholding tax on dividends, but the previous Brazilian government submitted a bill proposing to introduce a withholding tax of 15% on dividend payments. If introduced, the DTA will therefore be beneficial for multinationals operating in Brazil, especially as the 10% rate is lower than in many of Brazil’s other treaties. Consequently, the UK is likely to be a popular choice for companies investing into Brazil.
Interest (Article 11):
- 7% of the gross amount of interest paid to a bank or insurance company on a loan that was granted for at least a five-year period to finance infrastructure projects and public utilities;
- 10% of the gross amount of interest from:
- loans granted by banks and insurance companies in uncontrolled transactions;
- bonds or securities that are regularly and substantially traded on a qualifying stock exchange; and
- a sale on credit paid by the purchaser of machinery/equipment to the seller.
- In all other cases, the rate will be 15%.
This is a helpful reduction in the UK’s domestic withholding tax rate on interest of 20%, although many of the UK’s treaties reduce the withholding tax rate to 0%. In future, it is likely to be worth lenders from Brazil considering the availability of the UK’s qualifying private placement exemption, which would provide a full exemption from UK withholding tax provided the relevant conditions are met. It is worth noting that this exemption is only available where the lender and borrower are unconnected, however.
Even though the standard Brazil domestic withholding rate on interest is 15%, this provision is helpful to reduce the withholding tax rate to banking transactions and also on bonds or securities issued on qualifying stock exchange.
Royalties (Article 12):
- 10% of the gross amounts of all types of royalties.
As is the case for dividends, the 10% withholding tax rate for royalties is lower than in many of Brazil’s other treaties. This is another example of the more favorable nature of the DTA.
Technical services fees (Article 13):
- Phased out rates will apply to fees paid for managerial, technical, or consultancy services (with certain exceptions), as follows:
- 8% of the gross amount of the fees during the first two years;
- 4% of the gross amount of the fees during the third and fourth years;
- 0% thereafter.
This is the most relevant change in the history of DTA by Brazil as it represents a material reduction in the Brazilian domestic withholding tax rate of 15% for such services, especially for services provided over the longer term, and it would be worth multinationals revisiting their intra-group services structures to consider the impact of the more beneficial rates under this article.
Under the Protocol to the DTA, if Brazil agrees a treaty with another OECD member (other than a Latin American state) which includes rates lower than those set out above, those lower rates will automatically apply to this DTA too.
Older Brazilian DTAs, in general, treat the remuneration for technical services as royalties, while this DTA distinguishes between the two. As a result, this DTA is the first that Brazil has signed which provides a more beneficial withholding tax rate in respect of such services (again, particularly where they are provided over the longer term) than many existing DTAs that Brazil has entered into, with a few exceptions (i.e. the DTA between Brazil and Switzerland would benefit from the same reduced rates).
A relevant innovation of the DTA is the addition of paragraph 2 to Article 9 (Associated Enterprises), establishing corresponding transfer pricing adjustments via mutual agreement procedures. Brazil’s long-standing refusal to implement corresponding adjustments to eliminate double taxation, as recommended by the OECD Transfer Pricing Guidelines, has been subject to significant criticism by Brazil’s trade partners. Thus, the inclusion of the Article 9(2) is an important step towards the adoption of the OECD arm’s length standard, as required for the accession of Brazil to that Organization.
Another relevant novelty for Brazil’s DTAs is Article 24 (Offshore Activities). The main points of Article 24 include:
- Activities carried on offshore for more than 30 days in aggregate in any fiscal year, in connection with the exploration, exploitation or extraction of the seabed and subsoil and their natural resources, will be regarded as a permanent establishment (Paragraphs 1 to 4, and 6).
- In what may be of interest for so-called “digital nomads”: remuneration for services performed by a resident of a contracting state from an employment connected with offshore activities performed in the other contracting state may be taxed in that other state (Paragraph 7).
The DTA contains measures to implement the BEPS Action 6 minimum standard, aimed at preventing the granting of treaty benefits in inappropriate circumstances. However, Brazil has not yet signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting and has stated its intention to keep negotiating treaties bilaterally.
The DTA is a highly anticipated development for the UK multinationals currently operating in or planning to enter the Brazilian market. It contains the necessary building blocks to achieve tax certainty and minimize double taxation. In addition to income taxes, the scope of taxes covered under the DTA includes the Brazilian social contribution on net profit, a favourable development for UK businesses. The article on the Mutual Agreement Procedure aims to resolve a double taxation case and does not include an arbitration provision. How effective the dispute resolution tool will appear in practice is yet to be seen.
According to Alex Jorge, co-Practice Group Leader LATAM Tax at DLA Piper, “The DTA with the UK represents a major change of Brazil’s foreign tax policy, as it follows the international sourcing rules for services and provides reduced withholding tax rates, facilitating the process of joining the OECD and also paving the way for a DTA with the United States.”
Furthermore, Randall Fox, Head of International Transfer Pricing at DLA Piper in London, stated, “the implementation of the arm’s length principle in Brazil represents a fundamental shift, and this treaty will provide a mechanism to relieve double taxation in the future between Brazil and the UK. We would expect to see more Brazil treaties with mutual agreement procedure articles in the future as a result of their commitment to the arm’s length principle.”