For many years, the largest, most glaring hole in the UK’s double taxation agreement (DTA) network was Brazil.
Then, in what for treaty negotiation timelines is the blink of an eye (or an episode of a telenovela), a treaty has been signed by the UK with Brazil.
There are quite a few unusual provisions in the DTA, enough probably for a thesis, let alone an article, and so I have set out below a few of the articles that caught my eye.
Although neither the UK nor Brazil levies withholding tax (WHT) on dividends, Brazil is considering introducing a levy of 15%, with legislation drafted by the previous government and likely to be taken forward by the current one, and we await developments. If that goes ahead, then connected companies should get a reduction to 10%, but portfolio holders will still face 15%.
For interest, the treaty does not change the picture much. Most Brazilian non-bank loans will still face 15%, the domestic Brazilian rate. However, interest paid from the UK to Brazil will have its WHT reduced by 5%.
WHT on royalties is reduced to 10%, which is a satisfactory outcome for UK recipients reducing the WHT they face from 15% to 10%, but halves the UK WHT for Brazilian ones.
The interesting aspect is technical fees. The treaty gives a declining rate over the first five years, but what are the years? Is it the first five years of the treaty, or of the contract under which the fees are paid? Sadly, I think it is per contract, but we will see. Hopefully this will be addressed in the explanatory memorandum that will be published alongside the statutory instrument for the DTA, which is expected shortly.
There is a real blast from the past, in that the treaty has an independent personal services article for the self-employed. This article has actually been deleted from the OECD’s model as it is now usual for both the self-employed and companies to be included within the permanent establishment article.
The capital gains article is quite light and there is no property rich provision. Hence, UK property held indirectly by a Brazilian resident will not be taxable in the UK if the indirect holding is sold, as the treaty takes it outside the non-resident capital gains rules. Given that Brazil’s effective tax rate is 34%, we do not expect a rush for people to take advantage of this provision.
The other income article is also slightly odd, as all it does is stop extraterritoriality, because the source state is always allowed to tax any income. There is also no provision to tax distributions from trusts as if they were the underlying income (i.e. if the distribution was made up of dividends and property income, the treaty would be applied as if the beneficiary had received the dividends and property income direct).
Another article that needs mentioning is the entitlement to benefits, where we have the US-style limitation on benefits article, but with a huge improvement in that discretionary access can be given where the competent authority decides that there are no nefarious activities taking place. For example, the company was relying upon the equivalent beneficiaries test and one of its shareholders sells to a non-equivalent beneficiary, reducing the level below 75%. However, because the sale was for bona fide commercial reasons and the company is not seeking to take unfair advantage of the treaty, benefits can be given.
There is, however, a principal purpose test (PPT) to make the limitation on benefits less mechanical. Belt and braces or ensuring that the whole is effectively just a PPT? Answers on a postcard please!
That we have this treaty at all is to be celebrated and will come as a huge relief for some. I know that my former colleagues in HMRC will have got the very best deal they could from their counterparts and, as time goes by, I am sure there will be incremental improvements too.
For many years, the largest, most glaring hole in the UK’s double taxation agreement (DTA) network was Brazil.
Then, in what for treaty negotiation timelines is the blink of an eye (or an episode of a telenovela), a treaty has been signed by the UK with Brazil.
There are quite a few unusual provisions in the DTA, enough probably for a thesis, let alone an article, and so I have set out below a few of the articles that caught my eye.
Although neither the UK nor Brazil levies withholding tax (WHT) on dividends, Brazil is considering introducing a levy of 15%, with legislation drafted by the previous government and likely to be taken forward by the current one, and we await developments. If that goes ahead, then connected companies should get a reduction to 10%, but portfolio holders will still face 15%.
For interest, the treaty does not change the picture much. Most Brazilian non-bank loans will still face 15%, the domestic Brazilian rate. However, interest paid from the UK to Brazil will have its WHT reduced by 5%.
WHT on royalties is reduced to 10%, which is a satisfactory outcome for UK recipients reducing the WHT they face from 15% to 10%, but halves the UK WHT for Brazilian ones.
The interesting aspect is technical fees. The treaty gives a declining rate over the first five years, but what are the years? Is it the first five years of the treaty, or of the contract under which the fees are paid? Sadly, I think it is per contract, but we will see. Hopefully this will be addressed in the explanatory memorandum that will be published alongside the statutory instrument for the DTA, which is expected shortly.
There is a real blast from the past, in that the treaty has an independent personal services article for the self-employed. This article has actually been deleted from the OECD’s model as it is now usual for both the self-employed and companies to be included within the permanent establishment article.
The capital gains article is quite light and there is no property rich provision. Hence, UK property held indirectly by a Brazilian resident will not be taxable in the UK if the indirect holding is sold, as the treaty takes it outside the non-resident capital gains rules. Given that Brazil’s effective tax rate is 34%, we do not expect a rush for people to take advantage of this provision.
The other income article is also slightly odd, as all it does is stop extraterritoriality, because the source state is always allowed to tax any income. There is also no provision to tax distributions from trusts as if they were the underlying income (i.e. if the distribution was made up of dividends and property income, the treaty would be applied as if the beneficiary had received the dividends and property income direct).
Another article that needs mentioning is the entitlement to benefits, where we have the US-style limitation on benefits article, but with a huge improvement in that discretionary access can be given where the competent authority decides that there are no nefarious activities taking place. For example, the company was relying upon the equivalent beneficiaries test and one of its shareholders sells to a non-equivalent beneficiary, reducing the level below 75%. However, because the sale was for bona fide commercial reasons and the company is not seeking to take unfair advantage of the treaty, benefits can be given.
There is, however, a principal purpose test (PPT) to make the limitation on benefits less mechanical. Belt and braces or ensuring that the whole is effectively just a PPT? Answers on a postcard please!
That we have this treaty at all is to be celebrated and will come as a huge relief for some. I know that my former colleagues in HMRC will have got the very best deal they could from their counterparts and, as time goes by, I am sure there will be incremental improvements too.
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