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On June 30, 2022, the double taxation agreement (“DTA”) signed between Brazil and Singapore was ratified by the Brazilian Government. The DTA had already been ratified by Singapore at the end of 2021 and will enter into force from January 1, 2023.
On this regard, it is worth noting that the wording adopted by Article 30 of the DTA reveals situations of improper retroactivity that can generate opportunities for the application of the agreement to ongoing situations. This is because, with respect to withholding taxes, the DTA will apply in relation to income paid, remitted, or credited on the day or after January 1, 2023. Although this provision employs the expressions “paid”, “sent” or “credited “, there are some cases provided for in the DTA in which the withholding tax can only be charged in the event of” payment “, as it is the case of interest and royalties. Thus, by admitting the applicability of the DTA to the events of “remittance” and “credit”, it is possible to infer a retroactive effect, for example, for interest accrued and credited throughout 2022 (or in previous years) and which will be paid in 2023, when the ADT will already be in force.
The Brazil-Singapore DTA is part of a new policy of agreements that has been adopted by Brazil since 2018 (together with the DTAs with the United Arab Emirates, Switzerland, and Uruguay) and incorporates some recent changes promoted by the Organization for Economic Cooperation and Development (“OECD”) and the United Nations (“UN”) in the revisions of their respective models in 2017.
Below are the main aspects of the new DTA.
Limitations on taxation at source
The source taxation on dividends distributed by a company in Brazil or in Singapore to a resident of the other State is limited to 10%, if the beneficiary of these dividends holds at least 25% of the company distributing the dividends, and to 15% in all other cases. It is important to note that dividends are not currently subject to taxation in Brazil.
Interest may be taxed at source at the maximum rate of 10%, in case of a bank loan contracted for at least 5 years for the purchase of equipment or investment projects, and of 15% in all other cases. The protocol defines that interest on equity is considered as interest.
Royalties will be taxed at source at the maximum rate of 15% in case of royalties arising from the right of use or trademark, and of 10% in all other cases.
Taxation of technical services and technical assistance
Brazil’s strategy in some older DTAs for the taxation of fees for technical services was to expand, in the protocol, the concept of royalties contained in Article 12 as to comprise such fees, to allow income from technical services and technical assistance to be taxed at source .
In relation to technical services, the DTA Brazil-Singapore abandoned this strategy and is already following Article 12-A of the UN model, with the provision of a specific article for the taxation of technical services in Article 13, which limits withholding tax to 10. %. We highlight the overlap of scope between Articles 13 and 15 of the DTA (independent personal services), reason why we recommend a careful analysis of the definitions of both articles for the correct income qualification.
In relation to technical assistance services, the treatment as royalties via protocol was maintained, so that such income is taxed at source as royalties, also limited to 10%.
Taxation of capital gains
In line with other Brazilian agreements, capital gains are taxable both by the State of location of the asset and by the State of residence (Article 13). The novelty is in the wording of paragraph 4, which authorizes the taxation of indirect sales, as provided for in a few Brazilian DTAs, such as South Africa, the United Arab Emirates, Israel, Switzerland, and Uruguay. It is worth reminding that the authorization by the DTA is not enough to allow taxation by Brazil, which depends on a specific provision by the domestic legislation.
Elimination of double taxation – Credit method
Double taxation will be avoided by both Brazil and Singapore by the credit method, ie, the tax paid in the other country may be offset in the calculation of local tax (Article 24).
In the case of dividends, there is a specific provision for indirect credit in case of dividends paid by a Brazilian company to a resident in Singapore, with a stake of at least 10%: in this case, the credit shall consider the tax paid by the company on the fraction of the profits from which the dividend is paid.
Right to benefits
In line with the most recent agreements, the DTA has a benefit entitlement clause (Article 28), but whose rules are similar to the limitation of benefit clauses adopted by the agreements signed by the United States (“LOB”), which are based on the verification of certain requirements, and not on the analysis of business purpose.
In the case of DTA Brasil-Singapore, only a person qualified pursuant to Article 28 (2) and who actively conducts a business may benefit from the treaty, being it not sufficient to operate as a holding company, conduct supervision or management services to the group, promote group financing (cash pooling) or provide managing investments.
Article 11 of the Protocol provides that the DTA does not prevent the application of rules aimed at combating tax evasion and avoidance, including thin capitalization rules and the legislation of controlled foreign companies (CFC legislation).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.