Brazil: The Legal Effects Of International Tax Treaties In Brazil

Last Updated: 11 June 2012
Article by Walter Stuber

The Second Chamber of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça – STJ) recently ruled that international conventions signed by Brazil with the government of other countries for the avoidance of double taxation with respect to taxes on income (Tax Treaties) shall prevail over the domestic income tax legislation1 in the case of a foreign company contracted by a Brazilian company for the provision of services to be performed abroad without transfer of technology2.

The Brazilian company Companhia Petroquímica do Sul (Copesul) did not pay the Brazilian withholding income tax on the remittance abroad made to foreign companies for payment of the services rendered outside Brazil based on the provisions of Article VII of the Tax Treaty entered into between Brazil and Canada3, which establishes that: "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein."

The Brazilian Federal Revenue questioned such non-payment and assessed the tax, arguing that the remuneration due for the services so rendered do not fall into the definition of "business profits" (lucro da empresa estrangeira), provided for in Article VII of the Tax Treaty, because the profit is only perfected at the end of the relevant fiscal year, after the additions and deductions prescribed by the applicable Brazilian income tax legislation are made. For the Brazilian tax authorities, the income should be taxed in Brazil by the local source (Copesul), since it constitutes "other income" for the purpose of Article XXI of the Tax Treaty: "Items of income of a resident of a Contracting State, arising in the other Contracting State and not dealt with in the foregoing Articles of this Convention, may be taxed in that other State."

The Reporting Justice Castro Meira pointed out that the definition of profit presented by the Brazilian Federal Revenue does not correspond to the one provided for in the Tax Treaty. The term "business profit" refers to "operating profit" (lucro operacional) and not to income tax calculated on an actual profit basis (lucro real) 4.

He also stated that the conflict between the domestic tax legislation and the international tax treaties must be resolved according to the specialty of the standard. There is a "functional revocation" (revogação funcional), whereby the internal rules are relatively inapplicable to those situations listed in the international tax treaty, involving certain persons, situations and specific relationships, but it does not cause the stricto sensu revocation of the standard for all the other legal situations involving unrelated elements to the Contracting States. Therefore, Article VII of the Tax Treaty shall prevail over the domestic income tax legislation. The domestic income tax legislation requires that income tax be withheld by the Brazilian source to any income, capital gains and other earnings paid, credited or remitted to a foreign-based individual or legal entity5 and applies entirely and without any restriction whatsoever to any other legal relationships which are not expressly covered by the Tax Treaty.

In summary, based on the above-mentioned ruling issued by STJ, the Brazilian Federal Revenue cannot require the payment of the Brazilian withholding income tax at source in the case of services rendered to a Brazilian company by a foreign company which does not have a permanent establishment situated in Brazil, when there is a Tax Treaty between Brazil and the country of residence of such foreign company.


1 Brazil follows the Convention-Model of the Organization for Economic Co-operation and Development (OEDC) on its Tax Treaties, also known as Double Taxation Treaties (DTTs). This model forecasts two methods to eliminate double taxation: (i) tax credit method – consists of a tax credit concession. This credit permits to deduce the tax already paid in one of the countries from the other country´s tax; and (ii) tax exemption method – a country detains the exclusive right to tax incomes. Incomes taxed in this country shall be exempted in the other country.

2 Special Appeal (Recurso Especial) No. 1,161,467 – RS (2009/0198051-2), having the National Treasury (Fazenda Nacional) as Claimant/Appelant (Recorrente), and Companhia Petroquímica do Sul – COPESUL as Respondent/Appellee (Recorrido), as as Reporting (Relator) Justice Castro Meira, of the STJ. The decision was issued on May 17, 2012 and published in the Electronic Official Gazette (Diário da Justiça Eletrônico – DJE on June 1, 2012. The appeal filed by the National Treasury was denied.

3 The case at hand also mentions the Tax Treaty between Brazil and Germany, which contains exactly the same provisions and was revoked as of December, 2006. The present decision refers to services rendered in 2005, when the Tax Treaty with Germany was still in force.

4 The actual net profit is calculated by deducting total costs and expenses from the total revenue. The income tax only in the State of destination allows the foreign beneficiary to make the necessary adjustments to the calculation of profit effectively taxable to be carried out in such State of destination. If final retention is made at source, as intended by the Brazilian Federal Revenue, then no adjustments could be made, frustrating the possibility of set off if negative real profit occurs at the end of the fiscal year.

5 For remittances of royalties or payments for services entailing technology transfer, copyrights, royalties on trademarks and patents, technical services, technical assistance and administrative assistance, the applicable rate of the Brazilian withholding income tax is 15%. The contribution on economic activities must also be paid by the Brazilian entity at a rate of 10%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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