After a longer wait, the Agreement between the Swiss Confederation and the Federative Republic of Brazil for the avoidance of double taxation for income tax ("DTT") finally entered into force on 16 March 2021. The provisions of the DTT will become applicable as of 1 January 2022.
Switzerland and Brazil already signed the new DTT on on 3 May 2018 and it was ratified by the Swiss Parliament on 6 March 2019. However, the ratification process on the Brazilian side delayed the entry into force until mid-March this year. This is good news as Brazil was not only one of the few South American countries with which Switzerland did not yet have a DTT in place, but especially because Brazil is Switzerland's most important trading partner in Latin America. The fact that Brazil now ratified the treaty therefore gives many Swiss corporations more legal and, above all, more planning security. Here is what is in store:
The DTT basically reflects the ideas of the OECD's "Base Erosion and Profit Shifting" project. The DTT contains an abuse clause in Article 27, which corresponds to the "Principal Purpose Test". However, it is still largely based on the OECD’s Model Tax Convention. Thus, the residence of a person continues to be determined by means of the "tie-breaker rule" and the definition of permanent establishments also corresponds to a large extent to the OECD’s definition in its Model Tax Convention.
A corresponding adjustment mechanic was not included in Art. 9 DTT, which results in a certain legal uncertainty, but at least it is included in the Protocol (under 5. on Art. 9 and 25) that the omission of this corresponding adjustment is not to be interpreted in such a way that a corresponding adjustment is not possible in the context of a mutual agreement procedure. Therefore, it is to be hoped that the authorities will accept corresponding counter corrections.
The DTT provides the following withholding tax rates for dividends, interest, royalties and compensation for technical services:
|Withholding tax rates according to DTT|
|For qualified participation (at least 10% participation rate and minimum holding period of 365 days)||10.00%|
|Dividend payments to pension funds / national banks||0.00%|
|If certain conditions are met||10.00%|
|In connection with trademark income||15.00%|
|In the other cases||10.00%|
|Compensation for technical services||10.00%|
With regard to the above withholding tax rates, it should be noted that if Brazil grants lower withholding tax rates to another OECD member state in a new agreement, these lower withholding tax rates will also apply to the DTT with Switzerland ("most favored nation" clause).
Further, it should be mentioned that although the DTT does not provide a zero rate on dividends, based on Brazilian unilateral law, in principle no withholding taxes should be levied on dividend payments to foreign recipients.
In addition, due to the newly applicable DTT in Switzerland, it will be possible in the future to offset foreign withholding tax against Swiss income tax when it comes to interest, royalties and compensation for technical services.
In conclusion, it can be said that the new DTT will have a beneficial effect on the development of economic relations between the two countries and that Switzerland has become even more attractive in international comparison.