Tax Treaty Series: The Bilateral Income Tax Treaty Between Brazil And South Korea

This is the third 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 354, published on December 02, 1991, contains the text of the Bilateral Income Tax Treaty signed by Brazil and South Korea ("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. In addition, recent Law 13,202/2015 contains 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.

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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, 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 to a WHT credit in South Korea and vice-versa. Specifically:

For dividends paid by a resident of South Korea and received by a beneficial owner resident in Brazil, the maximum WHT is 15%.

If the remittance of dividends is made by a resident of Brazil to a beneficial owner resident in South Korea, the maximum WHT drops to 10% (the Treaty rate is reduced from 15% to 10% by Interpretive Declaratory Act 03, published on March 20, 2006). The same rate is applicable to the payment of dividends (or branch profits) by a permanent establishment of a Korean resident entity.

A tax sparing credit may be available for the Korean recipient as well as for the Brazilian recipient of dividends (see below). In Brazil, the tax sparing credit may be used to offset applicable IRPJ and CSLL.

Under current Brazilian Law, dividends paid to Brazilian or foreign recipients are exempt from WHT.1

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 two sets of exceptions below, the maximum WHT is 15%.

A tax sparing credit may be available for the Korean recipient as well as for the Brazilian recipient of interest (see below). In Brazil, the tax sparing credit may be used to offset applicable IRPJ and CSLL.

For interest received in the following situations, an exemption or non-imposition of WHT may be available:

Interest arising in a Contracting State and paid to the Government of the other Contracting State, including its political subdivision or local authority, or to the Central Bank of this State, or to any branch (even a financial institution) completely owned, either directly or indirectly, by this Government, by the Central Bank, or by both, is exempt from WHT in the first Contracting State.

Interest from obligations, bonds or debentures issued by the Government of a Contracting State, including its political subdivision or local authority, or by the Central Bank of this State, or by any branch (even a financial institution) completely owned, either directly or indirectly, by...