Brazil-Sweden tax treaty protocol would add technical services provision, reduce withholding taxes

Brazilian special secretary of the Federal Revenue Secretariat, Marcos Cintra, on March 19 signed a new protocol to the double tax agreement between Brazil and Sweden which would introduce significant changes to it’s the treaty.

The main alteration which, in our opinion, is subject to criticism is the introduction of a provision that will make technical services and technical assistance agreements subject to source taxation under article 12 (royalty article).

The Swedish treaty was one of five Brazilian tax treaties that did not contain such provision, the others being the treaties with Austria, Finland, France, and Japan.

It is our understanding that the text of the treaty shows that the Swedish government intends to qualify as royalties (and thus deviate from the OECD Model) only technical services and technical assistance that are directly connected to a transfer of technology that gave rise to a royalty payment.

Otherwise, Brazil would have pushed for a wording closer to some of its treaties signed with other source-oriented countries, such as Peru and India, where all technical services, administrative services, and administrative assistance fees are under the scope of article 12.

As we can see, the protocol to the Brazil-Peru treaty states:

“4. With reference to Article 12 ( “Royalties”), paragraph 3:

The provisions of paragraph 3 of Article 12 apply to any kind of payment received by the rendering of technical services and assistance.

The provisions of this item also apply to digital business services, including consulting.”

And, with the protocol to the Brazil-India treaty states:

“2. With reference to Article 12, paragraph 3 – It is understood that the provisions of paragraph 3 of Article 12 shall apply to payments of any kind to any person, other than payments to an employee of a person making such payments, in consideration for the rendering of assistance or services of a managerial, administrative, scientific, technical or consultancy nature.

As a comparison, the text of the recently signed Brazil-Sweden protocol states that:

“5. With reference to Article 12, paragraph 3

It is understood that the provisions of paragraph 3 of Article 12 shall apply to payments of any kind received as a consideration for the rendering of technical assistance and technical services.”

Withholding tax changes

In addition, under the Brazil-Sweden tax treaty protocol, the maximum withholding tax is reduced to 10% in case of a 10% or higher voting power; otherwise, withholding is 15%. Maximum withholding tax on interest is reduced to 10% in the case of a loan with a term longer than seven years for the sale of industrial equipment, investment projects, or the financing of government projects; otherwise withholding is 15%.

In addition, under the Brazil-Sweden tax treaty protocol, the maximum withholding tax is reduced to 10% in case of a 10% or higher voting power; otherwise, withholding is 15%. Maximum withholding tax on interest is reduced to 10% in the case of a loan with a term longer than seven years for the sale of industrial equipment, investment projects, or the financing of government projects; otherwise withholding is 15%.

There is a reduction of the maximum rates of withholding taxes on royalties to 15% on the gross royalty amount deriving from right to use or use of industry or commerce trademarks. Withholding is 10% in the remainder of cases.

Oher provisions

The exchange of information article is increased in scope in light of the recent developments with the FATCA and multilateral agreements.

The Brazil-Sweden tax treaty protocol includes a new article, XXVI-A, which treats a “right to the benefits,” similar to an “entitlement to treaty benefits” provision, which can be defined as an increased application of a beneficial ownership and limitation of benefits clause.

The protocol also includes a most favored nation provision for an eventual reduction in source taxation for interest, dividends, and royalties.

Another new provision provides that the Brazilian “interest on net equity” will be treated as interest for source taxation purposes in Brazil under the terms of article XI of the treaty.

It is important to note that the entry into force of the Brazil-Sweden tax treaty protocol will depend on approval by the Brazilian Congress and the Swedish Parliament. The treaty’s effects shall be observed as from the calendar-year following the entry into force.