- 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.
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 No. 2,363/2013 that recommended that its previous view set out in Opinion PGFN/CAT No. 776/2011 should be repealed.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).
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