Tax Treaty Series: The Bilateral Income Tax Treaty Between Brazil And Canada

This is the first of our series of posts on Brazilian tax treaties. In each post we will provide an overview of a specific tax treaty between Brazil and a particular foreign country, as well as comments on any Brazilian administrative or judicial precedents applying the treaty, and highlights on the impact of the OECD Base Erosion and Profit Shifting ("BEPS") project in its application.

Overview of the treaty

Decree 92,318, published on January 23, 1986, contains the text of the Bilateral Income Tax Treaty signed by Brazil and Canada ("Treaty"). This Treaty is aimed at preventing double imposition and double non-imposition of income taxes in cross-border operations between the two countries.

For Brazilian purposes, as of December 09, 2015, the treaty applies not only to the Individual and Corporate Income Taxes ("IRPF" and "IRPJ") and to the Withholding Income Tax ("WHT"), but also to the Social Contribution on Net Profits ("CSLL").

With regards to CSLL, even though this tax is not expressly mentioned in the Treaty, this tax was created after the signature of the Treaty, and as a partial replacement of IRPJ. In addition, recent Law no. 13,202/2015 included an article clarifying that double taxation treaties signed by Brazil include CSLL:

Art. 11. For purposes of interpretation, the international agreements and conventions signed by the Government of the Federative Republic of Brazil to avoid double taxation include CSLL. (...)

Please note that our reference to withholding income tax ("WHT") in the next paragraphs does not describe the entire tax burden imposed on certain income streams, such as royalties, for example. Other taxes may be imposed on cross-border royalty payments (such as the Special Tax on Royalties ("CIDE"), the Municipal Tax on Services ("ISS") and the Tax on Foreign Exchange Transactions ("IOF-FX")), but because these taxes do not qualify as "income taxes", they are outside of the scope of the treaty.

The Treaty was generally based on the OECD Draft Convention available at the time (1977), as well as on Brazilian tax treaty practice prior to 2000. Key aspects of this Treaty from a Brazilian perspective are:

Source taxation Dividends, interest and royalties earned are generally subject to WHT in Brazil and WHT credit in Canada.

Specifically for dividends, interest and royalties, a limit of 15% WHT applies, except in case of loans with maturity of 7 years or more, guaranteed or secured by the Canadian EDC (limit of 10%), and of trademark royalties (limit of 25%). Based on Brazilian domestic law, currently the applicable WHT on those payments is 15%, except in relation to dividends that are currently exempt.

In addition, the Treaty provides for:

exemption on dividends received by a Canadian company holding 10% or more of the Brazilian company's shares and the profits arose from operational activities; if this exemption does not apply, credit of Brazilian...