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Brazil Publishes Ruling on MFN Clause for Capital Gains on Shares Under Tax Treaty with Portugal — Orbitax Tax News & Alerts

Brazil has published Ruling No. 150 of 22 September 2021 regarding the taxation of capital gains derived by a Portuguese company from the sale of a direct investment (equity interest) in the shares of a Brazilian company.

Under Article 13 (Capital Gains) of the 2000 Brazil-Portugal income tax treaty, capital gains from any property can generally be taxed in both Contract States except for gains from the alienation of ships or aircraft operated in international traffic, etc. As such, capital gains derived from the sale of the shares would be subject to domestic withholding at the progressive rates of 15% to 22.5%. However, the final protocol signed with the treaty includes an MFN clause, providing that if Brazil concludes, with a third State not located in Latin America, a treaty that limits the taxation of capital gains in the Contracting State other than the State in which the beneficial owner is resident, then such limit will apply automatically to the relations between Brazil and Portugal.

Such other treaty is the 2002 Brazil-Israel income tax treaty, which provides that gains derived by a resident of a Contracting State from the direct or indirect sale, exchange, or other disposition (alienation) of shares in a company that is a resident of the other State may be taxed in that other State, but only if the resident of the first-mentioned State owned, directly or indirectly, at any time in the 12-month period preceding such alienation, shares giving right to 10% or more of the voting power in the company. Further, the tax so charged is limited to 15% of the gross amount of such gains.

Ruling No. 150 confirms that the limitation provided in the Brazil-Israel treaty applies by virtue of the MFN clause in the Brazil-Portugal treaty and, therefore, the gains derived by the Portuguese company are subject to withholding tax at the rate of 15%.