DTA between Switzerland and Brazil enters into force

The DTA is significant because it promotes economic relations between Switzerland and its most important trading partner in Latin America and adds an important partner to Switzerland's existing network of agreements in this part of the world.

The DTA takes into account the results of the BEPS project of the G20 and the OECD, which aims to combat the international reduction and shifting of profits. More information on the BEPS project can be found in our various blog posts on the BEPS project.

Essentially, the DTA is based on the OECD Model Convention. Below we explain some selected provisions of the DTA.

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Residence (Art. 4)

If a person is a resident of both contracting States within the meaning of the DTA, the so-called tie-breaker rule applies analogously to Art. 4 para. 2 OECD Model Convention, according to which only one of the two States is considered the State of residence under the DTA. The other State must therefore partially relinquish its right of taxation and is considered a source State under DTA law.

It should be emphasised in this context that the allocation of domicile of legal entities in the case of dual domicile under the DTA continues to be based on the place of actual management and not on a mutual agreement procedure, as proposed under the BEPS project.

Dividends (Art. 10)

The basic tax on dividends paid by a corporation resident in a contracting State to a beneficial owner resident in the other State is reduced under the DTA as follows:

- Principle: 15 percent;

- Exception in case of a significant participation of a corporation of at least 10% and a minimum holding period of 365 days: 10 percent.

Since Brazil does not unilaterally levy withholding taxes on dividends paid to foreign recipients, Brazilian recipients of dividends from Swiss sources in particular are currently likely to benefit from this provision, as it allows the Swiss residual WHT of 35% to be significantly reduced.

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Interest (Art. 11)

The base rate on interest paid by a corporation resident in one contracting State to a beneficial owner resident in the other State is reduced to 15 percent under the DTA. If specific conditions are met, the residual rate may be reduced to 10 percent for banks.

Royalties (Art. 12)

The base tax on royalties paid by a resident of a Contracting State to a beneficial owner resident of the other State is reduced (according to the DTA) as follows:

- Royalties for the use of trademark rights: 15 percent;

- All other cases: 10 percent.

Since Switzerland does not have any withholding taxes on royalties, this provision is particularly effective for recipients of royalties from Brazil who are resident in Switzerland.

Although it may be difficult in practice for a corporation domiciled in Switzerland to completely eliminate international double taxation by crediting Brazilian withholding taxes due to the still comparatively high withholding tax rates, the DTA nevertheless brings considerable advantages in this respect for licensing activities from Switzerland. Before the DTA came into force, Brazilian withholding taxes could only be deducted in Switzerland at the level of the tax base (so-called net taxation), which meant that international double taxation continued to exist to a large extent.

Remuneration for technical services (Art. 13)

Remuneration for so-called technical services can be taxed by the source state to the extent of 10 percent of the gross amount. Meanwhile, the term "remuneration for technical services" is broadly understood to mean remuneration of any kind for the provision of management tasks, technical services or even consultancy services.

Switzerland does not know any withholding taxes on such services. In this respect, this article only applies to Swiss companies that provide so-called "technical services" in Brazil. Thanks to this provision, the withholding tax of 15 percent, which Brazil levies unilaterally, is reduced by 5 percent to 10 percent. The residual taxes can in turn be credited by the taxpayer resident in Switzerland against his Swiss taxes. With residual withholding taxes of 10% on the gross amount, this is often not possible in the context of the ordinary credit system, especially for legal entities.

However, it remains to be seen to what extent the provision will be of practical relevance. As a rule, the requirements for a permanent establishment are likely to be met in the context of technical services, which means that the source state (in this case Brazil) has a comprehensive right of taxation for the income generated in this context.

Most-Favourable-Nation Clause (para. 8 Protocol DTA)

Should Brazil grant another OECD member state lower residual withholding tax rates than those described above, the lower withholding tax rates will also apply to the DTA with Switzerland.

The fact that such a clause can be of practical relevance was recently demonstrated by the example of India. An analogous clause in Switzerland's DTA with India led to the residual base tax on dividends being reduced from 10 to 5 percent in 2021.

Conclusion

With the conclusion of the double taxation agreement with Brazil, Switzerland closed a major gap in its DTA network. The previously missing DTA made cooperation with an important South American trading partner more difficult and hindered the radius of action of Swiss companies in Brazil. The new DTA brings legal certainty and will have a positive impact on future cooperation with Brazil.