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Tax Treaty between Brazil and the UK Signed — Orbitax Tax News & Alerts

On 29 November 2022, officials from Brazil and the UK signed an income and capital tax treaty. 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 and covers UK income tax, corporation tax, and capital gains tax.

Residence

If a person other than an individual is considered resident in both Contracting States, the competent authorities will determine the person's residence for the purpose of the treaty through mutual agreement, having regard to its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. If no agreement is reached, such person will not be entitled to any relief or exemption from tax provided by the treaty except to the extent and in such a manner as may be agreed upon by the competent authorities of the Contracting States.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or a connected project for a period or periods aggregating more than 183 days within any 12-month period.

Withholding Tax Rates

  • Dividends -
    • 10% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital in at least 365 days preceding the day of payment;
    • 0% if the beneficial owner of the dividends is a pension scheme;
    • otherwise, 15%, including for dividends paid out of income (including gains) derived directly or indirectly from immovable property by an investment vehicle that distributes most of this income annually and whose income from such immovable property is exempted from tax;
  • Interest -
    • 7% on the gross amount of the interest paid to a bank or insurance company on a loan of at least five years for the financing of infrastructure projects and public utilities;
    • 10% on the gross amount of the interest derived from:
      • loans granted by banks and insurance companies in transactions involving persons that are not associated enterprises;
      • bonds or securities that are regularly and substantially traded on a recognized stock exchange;
      • a sale on credit paid by the purchaser of machinery and equipment to the seller of the machinery and equipment;
    • 0% if the beneficial owner of the interest is a pension scheme, the Government of a Contracting State, a political subdivision thereof, or any agency (including a financial institution) wholly owned by that Government or a political subdivision thereof;
    • Otherwise, 15%
  • Royalties - 10%
  • Fees for technical services (managerial, technical, or consultancy) -
    • 8% of the gross amount of the fees during the first two years the treaty is effective;
    • 4% of the gross amount of the fees during the third and the fourth year;
    • 0% of the gross amount of the fees after the fourth year

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 10% 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 provides that interest for the purpose of Article 11 (Interest) includes interest paid as "interest on the company's equity" ("juros sobre o capital próprio") in accordance with Brazilian law.

MFN Clauses

The final protocol to the treaty includes an MFN clause providing that if, after the date of signature of this treaty, Brazil agrees, in a treaty with any other State, to rates that are lower (including any exemption) than the ones provided in Articles 10 (Dividends), 11 (Interest), and 12 (Royalties), the Contracting States shall consult with each other to consider whether to update Brazil-UK treaty.

The final protocol also includes a separate MFN clause providing that if, after the date of signature of the treaty, Brazil agrees, in a treaty with any other State that is a member of the OECD, excluding any State in Latin America, to rates that are lower (including any exemption) than the ones provided in Article 13 (Fees for Technical Services), then such rates shall automatically apply under the same terms, from the time, and for as long as such rates are applicable in the other treaty.

Capital Gains

The treaty provides that gains derived by a resident of a Contracting State that arise in the other Contracting State from the alienation of any property or right may be taxed in the other State, except gains from the alienation of ships or aircraft operated in international traffic and related moveable property.

Offshore Activities

Article 24 (Offshore Activities) provides that a permanent establishment will be deemed constituted where an enterprise carries on offshore activities in connection with the exploration or exploitation of the seabed or subsoil or their natural resources situated in a Contracting State, if such activities continue for a period or periods aggregating more than 30 days within any 12-month period. Substantially similar activities carried on by a closely related enterprise in a Contracting State are considered in determining if the 30-day threshold is exceeded.

Article 24 also provides that gains derived by a resident of a Contracting State may be taxed by the other State if derived from the alienation of:

  • Exploration, exploitation, or extraction rights;
  • Property situated in the other Contracting State and used in connection with offshore activities carried on in that other State; or
  • Shares deriving their value or the greater part of their value directly or indirectly from such rights or such property or from such rights and such property taken together.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation. However, the UK will exempt dividends paid to a company resident in the UK if the conditions for an exemption under UK law are met. An exemption may also apply for profits of a permanent establishment in Brazil of a UK company if the conditions for an exemption under UK law are met. It is further provided that in the event that dividends are not exempted (conditions not met), the UK will apply the credit method, and if the UK company receiving the dividends controls directly or indirectly at least 10% of the voting power of the paying company, the credit will take into account the Brazil tax payable on the profits in respect of which such dividends are paid.

Entitlement to Benefits

Article 29 (Entitlement to Benefits) includes several provisions regarding a resident's entitlement to benefits under the treaty, including that a resident of a Contracting State will only be entitled to the benefits of the treaty if the resident is a qualified person (as defined in the treaty). However, the benefits of the treaty may still apply where a resident is not a qualified person, subject to certain conditions, including where the resident of a Contracting State is engaged in the active conduct of a business in that State and the income derived from the other State emanates from, or is incidental to, that business. In this respect, it is further provided that if in accordance with the legislation of a Contracting State (including legislation implemented following the entry into force of the treaty) offshore income derived by a company from the following activities or any combination thereof:

  • operating as a holding company;
  • providing overall supervision or administration of a group of companies;
  • providing group financing (including cash pooling); or
  • making or managing investments, unless these activities are carried on by a bank, insurance enterprise, or registered securities dealer in the ordinary course of its business as such;

is not taxed in that State (except in relation to income from dividends) or is taxed at a rate of tax that is lower than 75% of the rate of tax applied to income from similar onshore activities, the other Contracting State 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.

It is also provided that the benefits of the treaty may still apply where a resident is not a qualified person where:

  • At the time when the benefit would otherwise be accorded and on at least half of the days of any twelve-month period that includes that time, persons that are equivalent beneficiaries own, directly or indirectly, at least 75% of the shares of the resident (equivalent beneficiary generally means any person that would be entitled to an equivalent or more favorable benefit under the treaty or domestic law); or
  • The competent authority of the Contracting State in which the benefits would otherwise be denied is satisfied that neither the establishment, acquisition, or maintenance of a resident of the other State, nor the conduct of its operations, had as one of its principal purposes the obtaining of benefits under the treaty.

Article 29 further provides that the benefits of the treaty will not apply to an item of income of an enterprise of a Contracting State derived from the other State if:

  • The first-mentioned State treats the income as attributable to a permanent establishment of the enterprise situated in a third jurisdiction; and
  • The income is subject to a combined aggregate effective rate of tax in the first-mentioned State and the third jurisdiction is less than the general statutory rate of company tax applicable in the first-mentioned State.

However, if benefits would be denied in such case with respect to an item of income derived by a resident of a Contracting State, the competent authority of the other Contracting State may, nevertheless, grant the benefits with respect to that item of income if, in response to a request by such resident, such competent authority determines that granting such benefits is justified in light of the reasons such resident did not satisfy the requirements (such as the existence of losses).

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 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 in Brazil from 1 January of the year following its entry into force, and in the UK from the first day of the second month next following its entry into force in respect of withholding taxes, from 1 April next following its entry into force in respect of corporation tax, and from 6 April next following its entry into force in respect of income tax and capital gains tax.