By Gabriel Bez-Batti, Associate, Brigagão, Duque Estrada Advogados, S. Paulo
On August, 5, Brazil’s Supreme Court published its decision in the Volvo case, which concerns the non-discrimination provision in the Brazil – Sweden tax treaty. At issue was whether the treaty’s non-discrimination provision prevents Brazil’s imposition of a withholding tax on dividend payments to non-residents. The same tax is not imposed upon Brazil residents.
While, as will be seen, the Court did not reach a final conclusion regarding the question at hand, the case has significant ramifications regarding the Brazilian courts’ power to interpret tax treaties.
Volvo’s Brazil tax appeal
The case concerns Extraordinary Appeal, n. 460.320, filed by the Brazilian government in a 1993 declaratory action filed by Volvo subsidiary, Volvo do Brasil Veículos Ltda. where the company asked for confirmation that it was not obliged to withhold tax on dividends remitted to its Swedish affiliate, Volvo Lastvagnar AB.
At that time, Article 77 of Law n. 8,383/1991 established a withholding tax on dividends remitted to non-residents at a rate of 15% while dividends received by residents in Brazil were not taxed, according to Article 75 of Law n. 8,383/1991.
Volvo argued the withholding tax was undue as the Article 24 (1) of the Brazil – Sweden tax treaty provides for equal tax treatment between Brazilian and Swedish nationals.
Brazil has a two-level judicial system. On the second level, the 4th Regional Federal Court stated that the taxation of a non-resident, in this case, does not violate Article 24 (1) of the tax treaty and the constitutional principle of equality because the residents in Sweden are not in a comparable situation to residents in Brazil. The court asserted that residence is a relevant criterion to define whether there is a discriminatory treatment or not.
Against this decision, the taxpayer filed a special appeal to the Superior Court of Justice. The Superior Court of Justice is the highest appellate court in Brazil for non-constitutional questions of federal law.
Superior Court of Justice opinion
The Ministers of the 1st Panel of the Court accepted the appeal, concluding that the principle of non-discrimination forbids the imposition of withholding tax for residents in Sweden if the same tax is not applied to residents in Brazil.
In our opinion, this view is incorrect. Article 24 (1) of the Brazil – Sweden tax treaty follows the OECD model convention and only prohibits discrimination based on the taxpayer’s nationality, not residence.
In fact, Brazilian residents in Sweden were also taxed, and therefore the residence is a relevant criterion to determine whether or not the principle of non-discrimination has been violated.
Brazil Supreme Court decision
On appeal to the Supreme Court, the reporter, Supreme Court Justice Gilmar Mendes, concluded that tax treaties should prevail over domestic law, especially because Brazil has signed the Vienna Convention on the law of treaties.
Justice Alexandre de Moraes then countered that there is no hierarchical superiority of the treaty over ordinary law. The Justice argued, though, that the tax treaty must prevail, as the criterion of specialty (lex specialis derogat legi generali) is applied.
The criterion of specialty, in general, says that the special rule has to preponderate over the general rule.
Accordingly, Justice Moraes, despite saying there is no hierarchy of treaties on ordinary law, analyzed Article 24 of the Brazil – Sweden treaty to conclude, in line with the reporter, that the taxation of dividends received by non-residents would not violate the principle of non-discrimination.
Justice Celso de Mello, on the other hand, argued there is no violation of Article 24 (1) as the domestic law adopted the tax residence and not nationality as a criterion for the incidence of the withholding tax. The Justice also said that the tax treaty must prevail, following the criterion of specialty.
The first dissent was given by Chief Justice Dias Toffoli, under a formal aspect. The Justice stated the Supreme Court has no constitutional competence (CF, Article 105, I, “a”) to analyze tax treaties.
The Constitution gives this competence to the Superior Court of Justice, which decided in this case that the principle of non-discrimination forbids the imposition of withholding tax for residents in Sweden if the same tax is not applied to residents in Brazil.
Justice Marco Aurélio followed the divergence, saying the Supreme Court is not competent to analyze the compatibility of the tax treaty with the domestic law.
As such, we have a tie scenario, as Justice Luiz Fux is impeded from voting.
Justices Gilmar Mendes, Edson Fachin, Roberto Barroso, Celso de Mello, and Alexandre de Moraes stated that the analysis of the tax treaty leads to the understanding that Article 24 does not prohibit the discrimination based on tax residence.
On the other hand, Justices Dias Toffoli, Marco Aurélio, Ricardo Lewandowski, Carmén Lúcia, and Rosa Weber argued that the Supreme Court has no constitutional competence to analyze tax treaties.
According to Article 13 of the Supreme Court internal law, the Chief Justice (Justice Dias Toffoli) has the power to break the tie.
The outcome
The judgment is now suspended, and therefore there will be a new session to achieve a final decision.
Currently, Brazil does not tax the distribution of dividends, whether distributed to residents or non-residents.
Bills are being discussed in the National Congress to impose a new tax on dividends, but it is unlikely that there will be a similar rule saying that only dividends remitted to non-residents should be taxed.
The real importance of the Volvo case has to do with the Supreme Court’s power to interpret tax treaties, which is important to other cases, such as the analysis of Brazil’s taxation of controlled companies resident in countries in which Brazil has an in-force tax treaty.
The decision in the Volvo Case is also an important step toward the stabilization of Brazilian Superior Courts’ jurisprudence regarding whether tax treaties prevail over ordinary law.
The resolution of these issues is fundamental to providing legal certainty to taxpayers and to countries that have signed tax treaties with Brazil.
Be the first to comment