Switzerland: New income tax treaty with Brazil

Income tax treaty generally reflects concepts presented by the OECD’s BEPS project

Income tax treaty generally reflects concepts presented by the OECD’s BEPS project

A new income tax treaty between Switzerland and Brazil has entered into force, and has an effective date of 1 January 2022.

The income tax treaty (signed in 2018 and ratified by both Switzerland and Brazil) generally reflects concepts presented by the OECD’s base erosion and profit shifting (BEPS) project.

  • The income tax treaty contains an “abuse clause” in Article 27 that generally corresponds to the “principal purpose test.”
  • The treaty is largely based on the OECD’s Model Tax Convention, and thus, the residence of a person continues to be determined by means of the “tie-breaker rule.”
  • The definition of permanent establishment largely corresponds to the definition provided by the OECD’s Model Tax Convention.

The treaty does not include in Article 9 a corresponding adjustment mechanic, but the Protocol reflects 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, the authorities may accept corresponding counter corrections.

Withholding tax rates

The income tax treaty provides the following withholding tax rates for dividends, interest, royalties, and compensation for technical services:

Withholding tax rates

Dividends

Rate

Portfolio

15%

“Qualified participation” (at least 10% participation and minimum holding period of 365 days)

10%

Dividend payments to pension funds / national banks

0%

 

Interest

Rate

In general

15%

When certain conditions are met

10% or 0%

 

Royalties

Rate

In connection with trademark income

15%

In all other cases

10%

 

Compensation for technical services

10%

      

  • Under a “most favored nation” clause, if Brazil in a new agreement grants to another OECD Member State lower withholding tax rates, then these lower withholding tax rates also are to apply with regard to the income tax treaty with Switzerland.
  • Although the income tax treaty does not provide a zero rate on dividends, based on Brazilian law, no withholding taxes in principle are to be levied on dividend payments to foreign recipients.
  • In Switzerland, given the new tax treaty, it is possible in the future to offset foreign withholding tax against Swiss income tax when it comes to interest, royalties, and compensation for technical services.

Read an April 2021 report prepared by the KPMG member firm in Switzerland

 

 

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