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Brazil-Untd A Emirates

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Update - Tax Treaty between Brazil and the UAE

The pending income tax treaty between Brazil and the United Arab Emirates was signed on 12 November 2018. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Brazilian federal income tax and the social contribution on net profit (Contribuiçăo Social sobre o Lucro Líquido - CSLL) and covers UAE income tax and corporate tax.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a Contracting State, any political subdivision or local government thereof or a government institution; otherwise, 15%
  • Interest - 10% if the beneficial owner is a bank and the loan has been granted for at least five years for the financing of the purchase of equipment or of investment projects; otherwise, 15%
  • Royalties - 15%
  • Fees for Technical Services of a managerial, technical, or consultancy nature - 15%

Note - Article 10 (Dividends) also provides that where a resident of a Contracting State has a permanent establishment in the other Contracting State, that permanent establishment may be subject to a tax withheld at source in accordance with the law of that other Contracting State. However, the tax so charged shall not exceed 15% of the gross amount of the profits of that permanent establishment determined after the payment of the corporate tax related to such profits.

The final protocol to the treaty clarifies that interest paid as "interest on the company's equity" ("juros sobre o capital próprio") in accordance with the Brazilian law is also considered interest for the purposes of Article 11 (Interest).

The final protocol also clarifies that the rendering of technical assistance is considered royalties for the purposes of Article 12 (Royalties).

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in the other State.

Unlike most treaties, the Brazil-UAE treaty provides that gains from the alienation of any other property that arises in the other Contracting State may also be taxed in that other State.

Natural Resources

Article 23 (Natural Resources) provides that nothing in the treaty shall affect the right of a Contracting State, or of any political subdivision or local government thereof, to apply its domestic laws and regulations related to the taxation of income and profits derived from natural resources and its associated activities situated in the territory of that Contracting State, as the case may be.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation.

Entitlement to Benefits

Article 29 (Entitlement to Benefits) includes the provision that if the legislation of the UAE contains provisions, or introduces such provisions after the signing of the treaty, whereby offshore income derived by a company from:

  • shipping;
  • banking, financing, insurance, investment or similar activities; or
  • being the headquarter, co-ordination centre, or similar entity providing administrative services or other support to a group of companies which carry on business primarily in third States,

is not taxed in the UAE or is taxed at a rate of tax which is lower than 60% of the rate of tax which is applied to income from similar onshore activities, Brazil shall not be obliged to apply any limitation imposed under the treaty on its right to tax the income derived by the company from such offshore activities or on its right to tax the dividends paid by the company.

Article 29 also includes the provision that the benefits of the treaty will not apply to an item of income of an enterprise of the UAE derived from Brazil if:

  • the UAE treats the income as attributable to a permanent establishment of the enterprise situated in a third jurisdiction;
  • the profits attributable to that permanent establishment are exempt from tax in the UAE; and
  • the tax imposed in the third jurisdiction on the income is less than 60% of the tax that would be imposed in the UAE on that item of income if that permanent establishment were situated in the UAE.

Article 29 also includes the provision that a company resident in the UAE shall not be entitled to any benefits provided by the treaty (other than a benefit under Article 27 (Mutual Agreement Procedure)) unless it proves that it was not a principal purpose of the company or of the conduct of its business or of the acquisition or maintenance by it of the shareholding or other property from which the income in question is derived to obtain any of such benefits to the advantage of a person who is not a resident of the UAE. Additionally, the company must prove that no more than 50% of its gross income is used, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) to persons not entitled to the benefits of the treaty.

Lastly, Article 29 includes a general anti-abuse provision, which provides that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force. The 2009 agreement between Brazil and the UAE Aimed at Promoting Tourism and Trade between both Countries Through the Reciprocal Exemption of Income Taxes for Air Transportation Companies will be suspended as long as the treaty is in effect.

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