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

This is the seventh 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 78,107, published on July 23, 1976, contains the text of the Bilateral Income Tax Treaty signed by Brazil and Austria ("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"). In particular, though, the Treaty with Austria establishes in Article 24 that the principle of non-discrimination between the tax treatment of Brazilian and Austrian nationals/residents applies to all taxes labeled as "impostos", not only the ones applicable to income. We discuss the application of this Article in further detail below.

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 was generally based on the OECD Draft Convention available at the time (prior to 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 to a WHT credit or to an exemption in Austria and vice-versa. Specifically:

For dividends received by a beneficial owner resident in a Contracting State, the maximum WHT is set at 15%. Under current Brazilian Law, however, dividends paid to Brazilian or foreign recipients are exempt from WHT.1

If the dividends are paid by a legal entity in Austria to a legal entity in Brazil that owns at least 25% of its stock, these dividends shall be exempt from IRPJ and CSLL in Brazil.

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 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 any financial institution exclusively owned by this Government, shall only be taxed in this Contracting State.

Under current Brazilian Law, interest paid to foreign recipients is subject to a WHT of 15%.2

For royalties, the maximum WHT rate is set at (a) 10% if they remunerate the use or right to use copyright associated to literary, artistic and scientific works, but not to movies or TV and radio shows; (b) 25% if they remunerate the use of trademarks; and (c) 15% in all other cases. Under current Brazilian Law, royalties paid to foreign recipients are subject to a WHT of 15%.3

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 (and from assets associated to the transportation by 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%.4 Source taxation is applicable even in case of non-resident seller and buyer - in this case, the...