Tax

In a welcome development, following negotiations that started in September, on 29 November 2022 a new double tax treaty was signed between the United Kingdom (“UK”) and Brazil (the “Treaty”).

The commencement date for the Treaty will be announced once the procedural requirements to give effect to the Treaty in both the UK and Brazil have been completed.

A treaty between the UK and Brazil has been a consistent ask for business for many years as a means of facilitating cross-border trade and investment as well as providing long term stability and certainty and mitigating double taxation. The Treaty is a welcome development in that regard. Further, although the position in the Treaty may look less beneficial than the position adopted in many of the UK’s other double tax treaties, it is more beneficial than the position taken at present in a number of Brazil’s other double tax treaties and covers areas that other treaties concluded by Brazil do not address.

Summary of the treaty

Assuming the Treaty is enacted in both jurisdictions as signed, we set out below a high-level summary of the key business related provisions of the Treaty¹:

• Scope: With respect to existing taxes, the Treaty applies to: (i) in the case of Brazil, federal income tax and the social contribution on net profit; and (ii) in the case of the UK, income tax, corporation tax and capital gains tax. The Treaty would continue to apply to any identical or substantially similar taxes to those set out in (i) and (ii) enacted in Brazil or the UK after the date of signing the Treaty
• Limitations of benefits: The availability of the Treaty is not automatic. Instead, the Treaty contains a limitation of benefits (or “LOB”) clause. The effect of this provision is to ensure that only those who satisfy one (or more) of the stated conditions are able to benefit from the Treaty. Accordingly, as an initial step, it will be important to determine whether the taxpayer satisfies one (or more) of the conditions for the application of the Treaty before jumping to the substantive tax relieving provisions.
• Residence: In order to mitigate double taxation, where a company is dual resident (for instance, incorporated in Brazil but centrally managed and controlled from the UK) the Treaty provides the now common approach that the relevant authorities in Brazil and the UK shall determine by mutual agreement where the company is tax resident. Although the mutual agreement process can be long-winded, it is a helpful development for dual-resident corporates.
• Immovable property: Income derived from immovable property (such as, for instance, letting income) can be taxed by the jurisdiction in which the immovable property is situated.
• Business profits: Unless a company resident in one state (e.g. the UK) is carrying on a business in the other jurisdiction (e.g. Brazil) through a permanent establishment (or has a “taxable presence” in Brazil as per Brazilian domestic law), profits of the company may only be taxed in its home state (i.e. the UK in this example). In circumstances where the company is carrying on a business through a permanent establishment in the other state, the usual profit attribution rules apply (and the Treaty includes detailed provisions relating to permanent establishments).
• Dividends: Although currently moot as neither the UK nor Brazil apply withholding tax to dividend payments the Treaty sets out provisions relating to dividend withholding tax. Of course, these provisions would take on greater significance were either the UK or Brazil to introduce a dividend withholding tax. As noted further below, the benefits of this clause are subject to a form of “most favoured nations” provision.
• Interest: Each of the UK and Brazil impose withholding tax on payments of interest to non-residents at a rate of 20% and 15% (or 25% where the recipient is resident in a tax haven) respectively. In this regard, it is important to note that the Treaty does not eliminate that withholding tax cost. Assuming the recipient is the beneficial owner of the interest, the Treaty provides that withholding tax rates on interest payments made by a resident of one state shall not exceed:
  • 0% in the case of interest paid to a pension scheme or governmental body / sub-division resident in the other state;
  • 7% in the case of interest paid to a bank / insurance company resident in the other state on a loan of at least five years for the financing of infrastructure projects and public utilities;
  • 10% in the case of interest paid to (i) non-associated banks / insurance companies resident in the other state, (ii) residents of the other state on bonds / securities that are regularly and substantially traded on a recognise stock exchange, or (iii) residents of the other state on sale on credit paid by the purchaser of machinery and equipment to the seller; and
  • 15% in all other cases.

Accordingly, outside of the specific exceptions noted, a payment of interest from Brazil to the UK would remain subject to the current 15% Brazilian domestic rate; in the inverse relationship, applying the Treaty, the current UK domestic interest withholding rate would only drop by 5% to 15% (although the fact that there is a treaty with a non-discrimination clause – see below – may allow Brazilian lenders to rely on the UK qualifying private placement exemption to eliminate UK withholding tax on interest payments from UK borrowers in certain cases). Although this is less beneficial than the position adopted in many of the UK’s other double tax treaties, it is more beneficial than the position taken at present in a number of Brazil’s other double tax treaties. As further noted below, the benefits of this clause are subject to a form of “most favoured nations” provision. Finally, to note that “interest on the company’s equity” (“juros sobre o capital próprio”) paid in accordance with Brazilian law is considered interest for the purposes of the Treaty.

• Royalties: Each of the UK and Brazil impose withholding tax on payments of certain royalties to non-residents, at the same rates as apply to interest withholding tax. Again, the Treaty does not eliminate that withholding cost but, instead, provides that withholding tax rates on royalty payments shall not exceed 10% (assuming the recipient is the beneficial owner of the royalty). Again, although this is less beneficial than the position adopted in many of the UK’s other double tax treaties, it is more beneficial than the position taken at present in a number of Brazil’s other double tax treaties. As further noted below, the benefits of this clause are subject to a form of “most favoured nations” provision.
• Fees for technical services: This provision is included in the Treaty to address Brazilian domestic withholding tax applicable (subject to exceptions) on payments to non-residents in consideration for the provision of certain managerial, technical and/or consultancy services (“Fees for Technical Services”). Assuming the recipient is the beneficial owner of the fee, the Treaty provides that withholding tax rates in respect of Fees for Technical Services shall not exceed:
  • 8% during the first two years;
  • 4% during the third and fourth years; and
  • 0% after the fourth year.

The position taken in the Treaty in respect of Fees for Technical Services is more beneficial than the position taken at present in a number of Brazil’s other double tax treaties. As further noted below, the benefits of this clause are subject to a form of “most favoured nations” provision.

• Capital gains: Other than in respect of certain gains arising from alienation of aircraft or ships (and associated movable property pertaining to the operation of aircraft or ships), gains derived by a resident of one state (e.g. UK) from the alienation of any property (or right) arising in the other state (e.g. Brazil) can be taxed by the other state (i.e. Brazil in this example). The drafting of this clause is broad. However, a point which investors in real estate and natural resources in particular will be interested to understand is the extent to which the Treaty affords protection against “non-resident capital gains tax” and indirect taxes.
• Offshore activities: Although not always seen in treaties, the Treaty includes an “offshore activities” article which, essentially, expands the circumstances where a non-resident will be treated as having a permanent establishment in the other state as a result of activities in connection with the exploration, exploitation or extraction of the seabed and subsoil and their natural resources. It is unsurprising this clause has been included in the Treaty given the offshore oil and gas activities of the UK and Brazil.
• Other:
  • Double taxation: Consistent with the stated objectives behind signing the Treaty, as is standard, the Treaty contains an “elimination of double taxation” provision.
  • Non-discrimination: The Treaty contains a “non-discrimination” clause which, although unremarkable in itself, is important with respect to the application of certain provisions of UK domestic law such as, for instance, the UK distribution exemption and the UK qualifying private placement exemption.
  • Mutual agreement procedure: The Treaty contains a MAP clause which may be invoked by a taxpayer in order to resolve disputes concerning the application of the Treaty.
  • Exchange of information: The Treaty contains the standard provisions allowing the exchange of information between tax authorities in the UK and Brazil.
  • Most favoured nations:
    • If, after the date of signing the Treaty, Brazil enters into a treaty with another state pursuant to which the applicable withholding rates on dividends, interest and royalties are lower (including any exemption) than those set out in the Treaty, Brazil is required to notify the UK of such and the UK and Brazil shall consult as to whether to amend the Treaty. As such, although there would be no automatic change to the Treaty following the conclusion of such other treaty, this is a helpful mechanic to be included in the Treaty.
    • However, to note that where Brazil enters into a treaty with another OECD state (other than a state in Latin America) pursuant to which the applicable withholding rates on Fees for Technical Services are lower than those set out in the Treaty, the rates in the Treaty would be reduced automatically to match those in the other treaty.

Final remarks

Although not yet in force, the signing of the Treaty is a positive development for business. Assuming that the Treaty is enacted in both jurisdictions, although cross-border taxes are not completely eliminated, the Treaty goes some way to mitigating those taxes and eliminating double taxation which should provide some much welcome certainty for business. We will provide further information on the Weil Tax Blog as and when further information becomes available regarding the commencement date of the Treaty.

¹ Please note that where reference is made to provisions of Brazilian domestic law or treaties Brazil has concluded with other states, this reflects our understanding of those provisions / treaties based on publicly available information and we have not taken steps to verify the accuracy of those statements with Brazilian tax advisors.