The doubt over whether German will renew the double taxation treaty with Brazil has a number of tax implications.
At the beginning of April 2005 the new president of the Brazil-Germany Chamber of Commerce announced the intention of the German tax authorities not to renew the agreement between Brazil and Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (the tax treaty), which would have the effect to revoke, as of January 1 2006, the tax treaty.
Under article 31 of the tax treaty, the German authorities have until June 30 2005 to give, through diplomatic channels, written notice of termination.
The termination of the tax treaty would not result in important changes to the taxation of transactions between both countries. Nevertheless, it would eliminate the protection related to the taxation limits imposed by the tax treaty for investors.
The applicable withholding income tax rates now applied in Brazil are not higher than those set out in the tax treaty. Brazilian domestic tax legislation does not subject dividends paid out of post-1995 earnings to income tax withholding, and generally provides for a uniform 15% withholding tax rate on most other outbound payments (25% in the case of payments made to tax haven jurisdictions).
On the other hand, the German investors will lose some tax benefits such as the tax-sparing credit opportunities provided in the tax treaty. Many of Brazil treaties contain tax-sparing and matching-credit provisions under which the treaty partner allows its residents to over-credit income taxes paid in Brazil.
The German authorities have contested for many years the interpretation given by the Brazilian authorities to article 7 (business profits) and article 9 (associated enterprises) of the tax treaty, which largely differ from many countries and also from the OECD.
Congress drops tax-base increase for service providers
The Brazilian government did not receive sufficient support from the Congress to ratify Provisional Measures 232 and 243, which increased tax for Brazilian service providers calculating income tax under a presumed-profits method. Under the provisional measure, the tax and social contribution calculation basis for service providers was going to be increased from 32% to 40% of the gross revenue of the entity.
On the other hand, the provisions included in Provisional Measure 232 concerning tax-bracket adjustments for personal income tax were approved by the House of Representatives on April 12 2005. The personal income tax brackets were adjusted through a raise of 10% of the income limits.
Nélio Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com), São Paulo
