On June 9, 2021 the Brazilian Government issued Decree No. 10,714/2, which concludes the ratification process of the Convention for the Avoidance of Double Taxation entered between Brazil and Switzerland (“Tax Treaty”).
We highlight below the main aspects of the Tax Treaty (others aspects may be relevant depending on the case):
|Income||Maximum Rate – Withholding Tax|
|Dividends (Article 10)||10% – 15% (1)|
|Interest (Article 11)||15%|
|Royalties (Article 12)||10% – 15% (2)|
|Technical Services (Article 13)||10% (3)|
(1) Article 10 is specially relevant and attractive because it limits to 10% the taxation over the remittance of dividends in the source country to 10%, if the beneficial owner is a company which holds directly at least 10 per cent of the capital of the company paying the dividends. In the absence of the Tax Treaty, dividends distributed by a company resident in Switzerland to a company resident in Brazil were subject to 35% taxation in Switzerland. Additionally, although the Brazilian legislation currently in force does not impose a withholding tax on the distribution of dividends by Brazilian companies, under a possible tax reform, the withholding tax will be limited to 10% when distributed to qualifying Swiss corporations. In other scenarios, e.g. dividends distributed to individuals, the withholding tax in both jurisdictions will be limited to 15%.
(2) The withholding tax on royalty payments to beneficiaries resident in both jurisdictions will be limited to 10%, except on payments for the use or right to use trademarks, where the limit is increased to 15%.
(3) Unlike the majority of the Tax Treaties previously signed by Brazil, the Tax Treaty with Switzerland has a specific article dealing with Technical Services, authorizing the imposition of a withholding tax in the source country over payments as compensation for managerial, technical or consulting services. This provision eliminates potential discussions over the characterization of such payments under article 7 (corporate profits) or article 12 (royalties), and reduces the withholding income tax levied in Brazil to 10%.
However, the application of the Tax Treaty depends on the fulfilment of Article 27 provisions, which aims at limiting its application in scenarios considered presumably abusive, i.e., in violation of the objective of preventing tax evasion.
With the issuance of Decree No. 10,714/21, the Tax Treaty will come into force as from January 1st, 2022.