The Legal Effects Of International Tax Treaties In Brazil

The Second Chamber of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça – STJ) recently ruled that international conventions signed by Brazil with the government of other countries for the avoidance of double taxation with respect to taxes on income (Tax Treaties) shall prevail over the domestic income tax legislation1 in the case of a foreign company contracted by a Brazilian company for the provision of services to be performed abroad without transfer of technology2.

The Brazilian company Companhia Petroquímica do Sul (Copesul) did not pay the Brazilian withholding income tax on the remittance abroad made to foreign companies for payment of the services rendered outside Brazil based on the provisions of Article VII of the Tax Treaty entered into between Brazil and Canada3, which establishes that: "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein."

The Brazilian Federal Revenue questioned such non-payment and assessed the tax, arguing that the remuneration due for the services so rendered do not fall into the definition of "business profits" (lucro da empresa estrangeira), provided for in Article VII of the Tax Treaty, because the profit is only perfected at the end of the relevant fiscal year, after the additions and deductions prescribed by the applicable Brazilian income tax legislation are made. For the Brazilian tax authorities, the income should be taxed in Brazil by the local source (Copesul), since it constitutes "other income" for the purpose of Article XXI of the Tax Treaty: "Items of income of a resident of a Contracting State, arising in the other Contracting State and not dealt with in the foregoing Articles of this Convention, may be taxed in that other State."

The Reporting Justice Castro Meira pointed out that the definition of profit presented by the Brazilian Federal Revenue does not correspond to the one provided for in the Tax Treaty. The term "business profit" refers to "operating profit" (lucro operacional) and not to income tax calculated on an actual profit basis (lucro real) 4.

He also stated that the conflict between the domestic tax legislation and the international tax treaties must be resolved according to the specialty of the standard. There is a "functional revocation" (revogação funcional), whereby the internal rules are...