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Brazil: STJ confirms tax treaty benefits apply on cross-border services income

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The two decisions provide clarity on the developing area of law

Alvaro Pereira and Mark Conomy of PwC Brazil take a look at a key STJ decision will assist companies carrying out cross-border transactions.

On May 19 2020, the Brazilian Superior Court of Justice (STJ) granted Special Appeal No. 1.618.897 (RJ (2016/0208110-5)), confirming that income related to the provision of technical services by a French company should not be subject to withholding income tax, due to the application of the tax treaty signed between Brazil and France. 



By way of background, the Brazilian tax legislation provides that income derived by non-residents in relation to the provision of technical services and assistance should be subject to withholding income tax at a rate of 15% (increased to 25% where the beneficiary is located in a tax haven). 



In this case, the beneficiary of the payments was a French company, which did not have a permanent establishment in Brazil, which rendered technical services consisting of construction and maintenance of submarine cables to a Brazilian entity. 



The main issue revolved around the interpretation of the Brazil-France tax treaty and its interaction with the domestic Brazilian law. Further, it considered the application of the business profits provision (Article 7) and whether it should apply to prevent the application of withholding tax on income relating to the services provided. 



In summary, the decision established the following:

  • International treaties and conventions should prevail over domestic legislation, due to the principle of specificity, except for the application of the federal constitution;

  • The Brazil-France tax treaty provides that the profits of a company of a contracting state are only taxable in that same state (being France), unless the company carries out its activity in the other state (Brazil) by means of a permanent establishment – which was considered not to be the case; and

  • Although recognising Brazil is not a member of the OECD, it has adopted the OECD model in relation to the business profits article of its tax treaties. The term ‘profit’ should be interpreted not as real profit, but as operating profit, being the result of activities, principal or accessory that constitute the purpose of the legal entity, including, income paid as consideration for services rendered.


In light of above, it was concluded that the special appeal should be granted, confirming the applicant's right not to subject the payments to withholding income tax, due to application of the Brazil-France tax treaty.




The decision referred to, and is consistent with, another important decision of the STJ, REsp. 1.161.467/RS (judgment dated May 17 2012), which previously led to formal changes in the Brazilian tax authorities (RFB) public position on this issue. 



This earlier decision of the STJ resulted in the Attorney General of the National Treasury (PGFN) releasing Opinion PGFN/CAT. No. 2,363/2013 that recommended that its previous view set out in Opinion PGFN/CAT No. 776/2011 should be repealed. This opinion had formed the foundation for the public position taken by the RFB in Interpretative Declaratory Act COSIT No. 1/2000 (ADI 1/2000). As such, shortly following the release of Opinion PGFN/CAT No. 2,063/2013, the RFB released Interpretative Declaratory Act 5/2014 (ADI 5/2014) formally modifying its public position and revoking ADI 1/2000. 

The decision provides a helpful precedent for companies that make cross-border transactions involving services with jurisdictions that have entered into tax treaties with Brazil. However, careful consideration still needs to be given to the type of service (technical versus non-technical), as well as the particular tax treaty to determine whether the relevant protocol includes such services within another specific article permitting source taxation (e.g. the ‘royalty’ article).



Alvaro Pereira

T: +55 11 3674 6526

E: alvaro.pereira@pwc.com



Mark Conomy

T: +55 11 3674 2002

E: conomy.mark@pwc.com



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