The Governments of Brazil and Switzerland have signed the Convention for Elimination of Double Taxation with Respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (DTT). In line with Brazil’s commitments under the G20, the DTT, signed on May 3, 2018, incorporates certain minimum standards of the Organization for Economic Cooperation and Development (OECD) Project on Tax Erosion and Transfer of Profits (BEPS Project). It also includes an anti-abuse clause as well as an administrative assistance clause in accordance with the current international standard for exchange of information.Unlike other treaties entered into by Brazil, the DTT has a specific article regulating the taxation of technical services. Under Article 13 of the DTT, fees for technical services will be subject to a maximum 10 percent withholding income rate in case the beneficial owner is a resident of the other contracting state. The definition of technical services is quite vast, including any service of a managerial, technical or consulting nature, with a few exceptions.
Even though this new Article 13 provides for a 10 percent rate (lower than the statutory rate of 15 percent to non-tax haven jurisdictions), it may be seen as a clear attempt by the Brazilian tax authorities to depart from court rulings favorable to taxpayers, in which consulting and technical services were considered business profits under Article 7 of other DTTs, taxed only by the contracting state that is providing such services (no withholding income tax applied). When the DTT enters into force, we may expect interesting discussions between tax authorities and taxpayers in Brazil.
Another interesting new feature in this DTT relates to Article 15 (Independent Professional Services), which provides for residency taxation and does not contain an exception for payments made by a source in the other contracting state. This is rather unusual, considering how this provision is addressed under other DTTs entered into by Brazil.
The DTT has other aspects worth noting, including a 10 percent royalty rate (except for industry and commerce licenses) and a reduced rate of 10 percent on interest to banks granting funding for capital investments under certain conditions, among other relevant aspects.
The signature reflects Brazil’s efforts to expand its network of tax agreements. In fact, the DTT is not the first treaty signed between Brazil and Switzerland. On November 23, 2015 and November 18, 2016, Brazil and Switzerland entered into an agreement for the exchange of information on tax matters and signed a joint declaration for the automatic exchange of fiscal information, respectively.
The DTT requires approval from the national Congress and ratification from the president to take effect in Brazil. The treaty is expected to facilitate investments and provide more certainty on business transactions between the taxpayers of the two countries.