Treaty Brazil UK against double taxation 240123

Brazil and the United Kingdom signed their double taxation treaty on November 30, 2022. This treaty is signed but will not enter into force until it has been ratified by both countries.

Brazil has signed agreements against double taxation with many countries, many of them in the 70s. But a new wave of bilateral agreements has been under negotiation with Brazil in recent years. These agreements are supposed to meet the requirements of the OECD, of which Brazil is eager to become a member. 

These treaties are very important to prevent people with interests in two different countries, with income and assets spread over both countries, from being taxed in both countries, thus doubly.

Historically, there is a conflict between countries that tax at the origin of the income and those that tax at the residence of the beneficiary.  This is a conflict between developing countries, which prefer to tax at the origin, and developed countries, which prefer the principle of taxation based on the residence of the beneficiary. 

The Organization for Economic Co-operation and Development-OECD provides a model of double taxation treaty that is more favorable to developed countries, i.e. favorable to taxation in the country of residence of the beneficiary, rather than in the country of source of income. 

On this point, the new United Kingdom – Brazil treaty favors taxation in the beneficiary’s country of residence, rather than in the country of source of income. Brazil, which invests little abroad, is, therefore, making concessions to move closer to OECD membership.

For example, the treaty between Brazil and the United Kingdom provides that the payments for technical services, rendered in one country by an entity from the other country, may be taxed in the source country at a maximum and regressive rates starting at 8% in the first two years of entry into force of the treaty, to 0% four years later, while the “general” withholding tax (“IRRF”) rate in Brazil is 15% and is often applied under the other treaties signed by Brazil.  The UK/Brazil treaty also provides for withholding tax upper limits on interest (from 7%) and royalties (10%), which are also more favorable than the rates provided for by Brazilian legislation (15%).

It’s to be noted that the UK/Brazil Treaty lays down specific provisions on payments for technical services, subject of Article 13 which is entirely dedicated to them. Older treaties do not have specific provisions on this remuneration, which has led to many conflicts of interpretation in Brazil.

Brazil reviews its bilateral double taxation treaties.

Beyond this historic agreement between Brazil and the United Kingdom, Brazil has embarked on a new phase of bilateral agreements on the tax issue with four treaties in 2022:  the United Kingdom, Norway, Poland and Colombia. Just before, agreements have been executed with Switzerland, the United Arab Emirates and Singapore.

These new treaties and the revision of older ones are part of Brazil’s strategy to fully integrate the Organization for Economic Co-operation and Development – OECD. In this sense, the new agreements all provide for the same requirements:

1. eliminate double taxation;
2. promote the sharing of tax information;
3. fight tax evasion;
4. align transfer pricing rules with the international model.

In addition, Brazil’s new treaties often include a new Article 13, dedicated to remuneration for technical services (“managerial, technical or consulting” services). The old agreements do not mention it, which has led to many tax disputes in Brazil.