in a nutshell
On 7 September 2022, Brazil and the United Kingdom issued a joint declaration announcing their intention to begin negotiations on a double taxation treaty (SeeTreaty”). The announcement was the result of years of discussion to advance both policy and technical issues. As such, the treaty could be signed by him on 29 November 2022, within three months of its publication. The treaty has not yet entered into force. It will come into force after completion of the legal procedures required by both countries, but it is not yet clear how long this will take.
The conclusion of a double tax treaty between the UK and Brazil is an important and welcome development that will affect many multinational groups, especially those providing services in the UK. Multinational groups, wherever their headquarters are located, are encouraged to reconsider their various supply chains, holding companies and investment structures to optimize the opportunities presented by the new treaty.
Dividend
In general, treaties reduce rather than eliminate withholding tax on dividends.
The treaty rate is capped at 15% unless the dividend beneficiary is a company that has held a direct interest of at least 10% of the payer’s capital for 12 months. In this case, the maximum interest rate under the treaty is 10%.
Dividends paid from real estate income (including profits) by investment vehicles with REIT-type features are also limited to a treaty rate of 15%. However, dividends paid to the pension plan are eligible for full exemption from dividend withholding tax in the source country.
There is currently no withholding tax on dividends as a matter of domestic law in the UK or Brazil, but in a scenario where the tax reforms under consideration in Brazil come into effect and a withholding tax on dividends being distributed is established, the treaty will It can be relevant and attractive. From Brazilian companies to non-residents. This legal change has been waiting for a vote in the Brazilian Senate for some time, but if implemented, it could introduce a withholding tax at a rate of 15-20%.
The treaty contains unusual provisions not found in the distribution provisions of either the 2017 OECD Model Tax Convention on Income and Capital or the 2021 UN Model Double Taxation Convention between Developed and Developing Countries. increase. Under Article 10(5) of the Convention, where a resident of one Contracting State has a permanent establishment in the other Contracting State, the other Contracting State imposes a withholding tax of up to 10%. It is recognized that of the after-tax profit of its permanent establishment.
interest
Withholding tax on interest payments is 7% for long-term (at least 5 years) infrastructure loans and 10% for other bank loans, bonds traded on recognized stock exchanges, and margin trading of machinery and equipment. Limited to %. 15% otherwise. As with dividends, pension schemes also benefit from exemption from withholding tax on interest in the payer’s Contracting State.
Brazil now has a growing handful of jurisdictions whose treaties with the UK do not fully exempt withholding tax on interest, so groups wishing to invest in the UK will have access to the often overlooked Qualified Private Placement (QPP). ) may consider the potential availability of exemptions in more detail. To eliminate any remaining UK withholding tax under the treaty. The QPP exemption only requires that the lender (who must not be linked to the borrower) resides in a treaty jurisdiction with a non-discrimination clause before providing full domestic law exemption from withholding tax on UK interest. request. The same treaty only reduces the withholding tax incurred, not eliminates it. Because the treaty includes a non-discrimination clause, parties to the funding agreement will consider her QPP exemption more than ever.
royalty
The treaty limits the withholding tax rate on royalties to 10%. Most double tax treaties signed by Brazil provide for a 15% tax rate, but some exceptions he is subject to a 10% tax rate. The treaty is therefore more beneficial in that it sets a 10% tax rate on all types of royalties.
Technical service fee
Unlike most of Brazil’s existing tax treaties, in line with the latest Brazilian treaty signed between Switzerland and Singapore, the treaty regulates technical services and includes administrative, technical, or consulting services. However, the treaty was innovative in that for the first two years of its entry into force he reduced the withholding tax rate to 8%, for the third and his fourth year he reduced it to 4%, and after the fourth year he lowers to 0%. Furthermore, with reference to Article 13, the Protocol to the Convention provides that if Brazil agrees low rates for technical services with other OECD member countries (excluding Latin American jurisdictions), such low rates shall be subject to the Convention. It is stipulated that it will automatically apply based on These provisions reflect significant changes in Brazilian taxation and create an opportunity for the Group to reconsider the structure of its service offerings in the UK.
Article 13 is based on Article 12A of the United Nations Model Tax Convention. Article 12A was added to the United Nations Model Tax Convention in 2017 to tax certain technical service fees paid by one Contracting State to residents of the other Contracting State on a gross basis at rates negotiated by the Contracting States. It is now possible. Generally, service charges paid by company A to company B can be deducted by company A when calculating income taxable in country A. No tax could be imposed on the payment from Company A to Company B to offset the effect of the deduction. However, under section 12A, if a resident of country A, or her non-resident of country A with a permanent establishment or fixed base in country A, pays for technical services, country A We reserve the right to tax our fees. The tax base erosion and profit shifting shown here raise concerns for both developed and developing countries. But from the perspective of developing countries, the problem is much more serious. Because they are disproportionate importers of technology services, they often lack the administrative capacity to control or limit such base erosion and profit shifting through domestic laws and anti-avoidance rules in tax treaties. .
Action 1 of the OECD/G20 BEPS project (Addressing the tax challenges of the digital economy) addresses the difficulties tax policy makers and tax administrations face when addressing new business models made available through the digital economy. is shown. For the time being, the OECD report did not recommend withholding tax on digital cross-border services, but countries were free to include such provisions in their tax treaties. The UN Model Tax Convention therefore goes further than the approach adopted under the OECD Model Tax Convention, which contains provisions governing taxation rights in the context of payments for technology services. not. Former withholding tax market countries where withholding tax treatment remains a significant political issue.
transfer pricing
The treaty also makes two minor differences with both the UN and OECD Model Tax Conventions, and provides a corresponding adjustment (reducing the taxable income of a company in one contracting make it difficult to obtain Additional taxable income in the other Contracting State as a result of adjustments relating to non-arm’s length transactions between enterprises.
First, the corresponding adjustments must only be made pursuant to mutual agreement procedures, which do not allow competent authorities to submit to arbitration issues they cannot agree on. Second, competent authorities can reach agreement. In such cases, the Convention provides that such agreements shall be implemented regardless of the deadlines of the domestic laws of the Contracting States, but does not apply this provision with respect to the corresponding adjustments. Corresponding adjustments must be made … after the expiry of the deadlines stipulated by national law ”.
It is also worth noting that mutual agreement procedures are not possible under the treaty if the transfer pricing adjustment in question resulted from negligent conduct.
From the UK’s perspective, these are unnecessary departures from the UN and OECD Model Tax Conventions. However, from a Brazilian perspective, Article 9 constitutes another innovation in the treaty that allows for corresponding transfer pricing adjustments through a mutual agreement procedure, in contrast to Brazil’s existing tax treaties. Historically, Brazil has always refused commitments to apply corresponding transfer pricing adjustments due to the transfer pricing regime currently adopted in Brazilian law. The text of Article 9 of the treaty is an important step in the right direction to bring the Brazilian treaty in line with her OECD guidelines.
Capital gain
Article 14 provides, inter alia, for the allocation of taxing rights in respect of capital gains arising from the sale of shares of a company in which a resident of one Contracting State is a resident of the other Contracting State.
The Convention provides that profits arising from the disposal of property or rights arising in the other Contracting State by a resident of one Contracting State (other than those relating to ships or aircraft) may be taxable in the other Contracting State. It stipulates that there is
Right of residence and benefits
The treaty does not contain a corporate residency tiebreaker provision. Under Article 4(4), residence is determined by mutual agreement of the competent authorities and in the absence of such agreement the taxpayer is entitled to treaty relief only to the extent agreed between the authorities. .
The application of the Convention is generally limited to “qualified persons”. It covers companies whose major classes of shares are regularly traded on a recognized stock exchange and their 50% subsidiaries. Companies that are not “eligible” are still eligible if they are at least 75% owned by equal beneficiaries. This is consistent with the simplified restrictions on the provision of benefits in multilateral agreements.
A UK company carrying on active business in the UK, even if not owned by a qualified person or by an equivalent beneficiary, with respect to Brazilian source income arising from or incidental to that business: You are entitled to the benefits of the treaty.
The treaty takes a number of positions that clearly position the UK as an optional holding jurisdiction for Brazilian resident companies. We are conducting a detailed review of the treaty and whether its terms are likely to put the UK at or near the top of the list as the most favorable counterparty jurisdiction for Brazilian residents. We appreciate it. We are happy to discuss the opportunities and efficiencies this treaty may have brought to your structure. Please contact our team.
