Brazil guidance addresses treatment of brand name, know-how under Brazil-France tax treaty

By Francisco Moreira, Bichara Advogados, São Paulo

The Brazilian tax authorities have once again imposed withholding tax on payments normally classified under article 7 as business profits.

In an October 2 ruling, the tax authority concluded that payments for the use of a brand name and know-how are covered under the royalties article (article XII) of the Brazil-France tax treaty and, as such, are subject to a 15 percent withholding tax in the source country.

Moreover, the payments are subject to Brazil’s CIDE, an additional10 percent tax on remittances, which is not included within the scope of the Brazil-France tax treaty, the tax agency said, in Ruling, n. 180/18 (Solução de Consulta COSIT).

The ruling answers an inquiry made by a Brazilian taxpayer that sought to pay a French nonprofit agency for the organization of an event in Brazil.

Under the arrangement, payments would be made for the use of the nonprofit’s brand name and transmission of knowledge and expertise for execution of the event.

The Receita Federal do Brazil (national tax agency, or RFB) concluded these payments were royalties, reinforcing the view of some scholars that, if there ever was a Brazilian model convention, such model-treaty would always shift taxation of royalties and services to the source country.

Unfortunately, ruling does not address the tax treatment of the technical and administrative services provided, which would be helpful given the authorities’ aggressive position in this ruling.

The treaty between Brazil and France does not have a protocol clarifying that technical and administrative services are included under the Article XII royalty provisions.

Moreover, Brazil’s treaties with Japan, Finland, Sweden, and Austria also do not include such a protocol, leaving in doubt the application of Brazil’s withholding tax to payments made to residents of these countries, as they normally must go to courts to have their rights guaranteed.