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

This is the sixth 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 5,922, published on October 4th, 2006, contains the text of the Bilateral Income Tax Treaty signed by Brazil and South Africa ("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 generally 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. 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.

The Treaty is generally based on the OECD Model Convention available at the time (2003), as well as on Brazilian tax treaty practice after 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 Africa and vice-versa. Specifically:

For dividends received by a beneficial owner resident in a Contracting State, the maximum WHT is (a) 10% if the beneficial owner is a legal entity that owns at least 25% of the stock of the payor, or (b) 15% in all other cases.

A special rule provides that the profits of a permanent establishment, when distributed to the foreign owner in a Contracting State, shall be subject to a WHT of up to 10%. Though Brazil generally regards permanent establishments as domestic legal entities, it would seem that if a relevant permanent establishment qualifies as a branch under Brazilian Law, a rate of up to 10% would apply.1

In practice, it is difficult to form a branch of a foreign entity in Brazil, since our law requires authorization from the President, via Presidential Decree, to incorporate such a branch, in such a way that, in practice, only few companies operate in Brazil via branches. The most commonly found structure is a subsidiary, which is incorporated as a Brazilian company.

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 generally set at 15%. However:

(1) Interest arising in a Contracting State and paid to the Government of the other Contracting State, including any of its political subdivisions, or to its Central Bank, or to any financial institution exclusively owned by this Government, or owned by a political subdivision thereof, is exempt from WHT in the first Contracting State - except if the interest is classified under item (2) below.

(2) Interest from obligations, bonds or debentures issued by the Government of a Contracting State, or by a political subdivision thereof, or by any financial institution exclusively owned by this Government, or exclusively owned by a political subdivision thereof, shall only be taxed in this Contracting State.

(3) In all cases, the limitation of the WHT rate shall not be applicable to agencies or branches of South African banks located in other States.

Under current Brazilian Law, interest paid to foreign recipients is generally subject to a WHT of 15%,3 which is coincident with the treaty limit. In case of Brazilian governmental bonds issued locally, based on our internal law, exemption applies to non-resident investors that comply with a number of requirements (residing in a jurisdiction other than a tax haven, registration with the Central Bank and Brazilian SEC as a qualified foreign investor - "4,373 Regime", appointment of a Brazilian Bank as representative in Brazil).

For royalties derived from trademark use, the maximum WHT rate is 15%. In all other cases...