Argentina, Brazil agree on key tax treaty changes

by Francisco Lisboa Moreira & Sandra Diaz

Brazil and Argentina signed a tax treaty July 21, making some important modifications to the countries’ existing agreement. The tax treaty, which is not yet in force, will probably require additional evaluation by the taxpayers from both countries.

New withholding tax rates

The new Brazil-Argentina agreement, signed during a regional meeting of Argentina, Brazil, Paraguay, and Uruguay, introduces new maximum withholding tax rates for dividends of 10% and 15%.

The treaty specifies that withholding from permanent establishments (PEs) of Argentinian companies in Brazil and of Brazilian companies in Argentina will be 10% of the gross benefits of the PE.

Interest payments will bear withholding tax at 15%, and the rate for royalties will be either 10% or 15%.

We highlight that the existing tax treaty does not foresee maximum withholding tax rates for such situations.

The treaty also clarifies that the maximum withholding tax rate for dividends does not apply to dividend distributions that were not previously subject to the withholding tax under the countries’ treaty.

Credit method, technology transfers

For Argentine taxpayers, the method to prevent double taxation was changed under the treaty from the exemption method to the credit method.

Further, for a transfer of technology, a maximum withholding tax rate of 10% will apply, as long as the contract is registered in accordance with internal legislation requirements. For all other cases, a 15% maximum rate will apply.

The treaty also includes a new definition of technical services and technical assistance.

BEPS provisions

Several provisions implementing the OECD/G20 base erosion profit shifting (BEPS) plan agreements are included in the revised treaty, mainly those arising from action 6 (treaty abuse), action 7 (PE status), and action 14 (dispute resolution).

The treaty adopts changes to the definition of a PE to prevent its artificial avoidance by means of exempting concrete measures, such as commission agreements or harmful activities in the insurance activity.

It also introduces a principal purpose clause and limitation on benefits to avoid tax treaty abuse, denying treaty benefits when tax avoidance was the sole reason for a transaction (non-business reasons).

Finally, the treaty introduces a specific clause to prevent/avoid double taxation on wealth. In other instances, the treaty refers to income, not wealth.