Introduction

Brazil is the most important trading partner for Switzerland in Latin America, while Switzerland is the sixth largest investor in Brazil. The two countries recently took steps to strengthen their economic ties.

On May 3 2018 Switzerland and Brazil signed a double taxation agreement, which is a major achievement for both countries and has been a long-standing demand of the private sector. The new agreement will significantly increase Switzerland's attractiveness for Latin American investments and provide investors with legal certainty in tax matters.

New agreement

Although Brazil is not (yet) a member state of the Organisation for Economic Cooperation and Development (OECD), the agreement has been drafted in line with the OECD's recommendations and is aligned with the base erosion and profit shifting actions. Specifically, it provides for:

  • anti-abuse provisions;
  • a mutual agreement clause (without containing an arbitration clause); and
  • an exchange of tax information on request in accordance with the existing international standard.

The agreement includes the following provisions to facilitate international cross-border investments and financial transactions:

  • The residual withholding tax on dividends is limited to 10% if an interest of at least 10% has been held directly in the company for at least one year and 15% in all other cases (profits and dividends distributed to resident or non-resident beneficiaries – individuals and legal entities – are not typically subject to income tax withholding in Brazil).
  • Generally, the residual withholding tax is:
    • 15% for interest payments;
    • 10% for specific bank loans; and
    • 0% for certain pension funds and government agencies.
  • As regards royalties, the residual withholding tax is 15% on trademarks and 10% in all other cases.
  • An exemption from capital gains tax on the sale of shares (unless real estate companies are involved) in the country where the company is located.

In addition to and deviating from other double taxation agreements entered into by Brazil, the latest agreement includes the following provisions:

  • It would explicitly apply to the Brazilian net profit social contribution.
  • A residual 10% Brazilian withholding tax could be applied to fees paid out of Brazil for technical services rendered from Switzerland.

Under Article 23 of the agreement, Brazil eliminates any relevant double taxation by applying the credit method, whereas Switzerland applies either the credit or the exemption method, depending on the source of income. In line with the OECD's recommendations, the agreement contains no tax sparing or tax matching clauses.

As a next step, the agreement must be approved by the Brazilian National Congress and the Swiss Parliament. Only once it has been ratified by both countries will the agreement enter into force. At this stage, it is hard to predict when this will happen.

Comment

Companies and corporate groups should review their structuring opportunities under the double taxation agreement, both for existing structures and international expansions. This may also apply to corporate groups with headquarters in third countries that substantially operate or plan to substantially operate in both Brazil and Switzerland.

For further information on this topic please contact Maurus Winzap or Martin Busenhart at Walder Wyss by telephone (+41 58 658 58 58) or email (maurus.winzap@walderwyss.com or martin.busenhart@walderwyss.com). The Walder Wyss website can be accessed at www.walderwyss.com.

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