Double Taxation Conventions (DTCs) with Singapore, Switzerland and United Arab Emirates

Double Taxation Conventions (DTCs) with Singapore, Switzerland and United Arab Emirates

On Monday, March 1, 2021, Legislative Decrees 02/2021, 03/2021 and 04/2021 were published, approving the Double Taxation Convention (DTC) with Singapore, Switzerland and United Arab Emirates, respectively.

After this legislative approval, the only remaining step for the DTCs to take effect is the issuance of the respective executive decrees.

The main objective of the DTCs is to improve the business climate between Brazil and each of the three countries, by providing greater legal certainty, attracting investments and preventing discrimination based on nationality, while maintaining the taxing capacity of the Contracting States.

Below we summarize the main points of the referred DTCs:

(i) application to Social Contribution on Net Profit (CSLL) as well as Corporate Income Tax (IRPJ) (Article 2);

(ii) a specific rule on remuneration for technical services (Article 13), classified as any payment in return for the rendering of any service of a managerial, technical or consultative nature, unless the payment is made: (a) to an employee of the party that makes the payment; (b) because of teaching services rendered by an educational institution; or (c) by an individual for services of personal use of an individual;

(iii) the remuneration for technical services rendered by an entity in one Contracting State paid to a resident in the other Contracting State may be taxed in this other State, limited to: (a) 10% (ten percent) when paid to beneficiaries residing in Singapore or Switzerland; and (b) 15% (fifteen percent) when paid to beneficiaries residing the United Arab Emirates.

In our opinion, these provisions seek to clarify the controversy involving remuneration for technical services, which have in the past been classified under Article 7 of the DTCs based on the OECD Model, which covers business profits, without the levy of the Withholding Income Tax (IRRF), reservation made for the situations of legal classification of remuneration for technical services as royalties (Article 12 and Protocol), as set forth in several such DTCs.

(iv) The income resulting from provision of technical assistance is classified as royalties (Article 12);

(v) The interest on net equity, paid according to Brazilian tax legislation, is classified as interest (Article 11);

(vi) Besides this, if Brazil adopts with any country that is a member of the Organization for Economic Cooperation and Development (OECD) rates lower than those specified in Article 11, item 2, letters “a” and “b”, these rates shall be applicable under the three new DTCs.

(vii) There also is a rule regarding limitation on benefits (LoB) in cases where it is reasonable to conclude that, considering all the relevant facts and circumstances, the obtainment of this benefit was one of the principal objectives of any business arrangement or transaction that resulted directly or indirectly in the referred benefit.

The Tax Department of Castro Barros is available for any additional clarifications that may be necessary.