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

This is the second of our series of posts on Brazilian tax treaties. In each post we 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 355, published on December 03, 1991, contains the text of the Bilateral Income Tax Treaty signed by Brazil and the Netherlands ("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 regard to CSLL, this tax is not expressly mentioned in the Treaty, because it was created after its signature, and as a partial replacement of IRPJ. However, recent Law 13,202/2015 clarifies that Bilateral Income Tax 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 the 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.

It is also important to highlight that although the Netherlands are one of our Treaty partners, they are also included in our list of favorable fiscal regimes ("graylist"). Specifically, Brazilian authorities consider that the Dutch regime "applicable to legal entities incorporated as holding companies that do not perform substantial economic activities" is a graylisted regime.1 In this section, we will address the interplay between the terms of the treaty and the potential qualification of the Dutch beneficiary as a graylisted company.

The Treaty was generally based on the OECD Draft Convention available at the time (1977, with amendments), 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 may either be exempt from taxation or subject to a WHT credit in the Netherlands. Specifically:

For dividends received by a beneficial owner resident in a Contracting State, the maximum WHT is 15%. A tax sparing credit may be available for the Dutch recipient (see below). For dividends received by a beneficial owner who has a permanent establishment in the source country, if the receipt of these dividends is related to the activities of this permanent establishment, the remittance is exempt from WHT. Please note:

If the recipient is resident in the Netherlands, these dividends may be exempt in the Netherlands.

If the recipient is resident in Brazil, these dividends will be subject to a WHT credit, which may be used to offset applicable Corporate Income Tax ("IRPJ") and Social Contribution on Net Profits ("CSLL").

Under current Brazilian Law, dividends paid to Brazilian or foreign recipients are exempt from WHT.2

For interest received by a beneficial owner resident in a Contracting State, the maximum WHT is 10%, if the recipient is a bank and if the loan is granted for a minimum term of 07 (seven) years, related with the purchase of industrial equipment, or with the study, acquisition or installation of industrial or scientific units, or with the financing of public works. In all other cases, safe for the exception below, the maximum WHT is 15%. These two types of remittances may be subject to a tax sparing credit for the Dutch recipient (see below).

For interest received by a beneficial owner who has a permanent establishment in the source country, if the receipt of the interest is related to the activities of this permanent establishment, the remittance is exempt from WHT. Please note:

If the recipient is resident in the Netherlands, the interest may be exempt in the Netherlands.

If the recipient is resident in Brazil, the interest will be subject to a WHT credit, which may be used to offset applicable IRPJ and CSLL.

Under current Brazilian Law, interest paid to foreign recipients is subject to a WHT of 15%.3

For royalties derived from trademark use, the maximum WHT rate is 25%. In all other cases (including payments for technical services and technical assistance), safe for the exception below, the maximum WHT rate is 15%. These two types of remittances may be subject to a tax sparing credit for the Dutch recipient (see below).

For royalties received by a beneficial owner who has a permanent establishment in the source country, if the receipt of the interest is related to the activities of this permanent establishment, the remittance is exempt from WHT. Please note:

If the recipient is resident in the Netherlands, royalties may be exempt in the Netherlands.

If the recipient is resident in Brazil, royalties will be subject to a WHT credit, which may be used to offset applicable IRPJ and CSLL.

Under current Brazilian Law, royalties paid to foreign recipients (including payments for technical services and technical assistance) are subject to a WHT of 15%.4

Capital gains, differently from the OECD Model Convention, are taxable in both Contracting States, and there is no WHT limitation in the Treaty. The only exception is Article 13, paragraph 2, which determines that gains obtained from alienation of ships and aircrafts are taxable only in the country where the headquarters of the company are located. Under current Brazilian Law, capital gains obtained by foreign residents (not located in a tax haven) are subject to a WHT of 15%.5 Source taxation is applicable even in case of non-resident seller and buyer - in this case, the buyer is required to withhold...