Brazilian tax ruling applies most favoured nation clause in tax treaty with Portugal

By Jack Taylor, LLM Candidate, University of Minho

The Brazilian tax authorities (Receita Federal) in a ruling dated 22 September (Solucao de Consulta n. 150 – Cosit) applied the most favoured nation principle in a case under the Brazil-Portugal double tax agreement.

In this case, the Brazilian tax authorities, by reference to Article 13 of the Brazil-Israel double taxation agreement, ruled that sales of shares or equity by a Portuguese-resident company in Brazil are subject to a capital gains tax limit of 15%. 

The case involved a Portuguese company selling shares in a Brazilian company. Under domestic Brazilian law and Article 13(4) of the Brazil-Portugal tax treaty, such sale would generally be subject to capital gains tax at rates ranging from 15–22.5%, depending on the value of the sales. 

However, the Portuguese company referred to a clause in the Brazil-Portugal tax treaty, specifically Item 6 of the protocol to the treaty. Item 6 provides that should Brazil enter into an agreement on tax with a non-Latin American country that limits capital gains taxation in Brazil, then this limitation would also apply to relevant cases under the Brazil-Portugal tax treaty.

Brazil entered into a tax treaty with Israel in 2005 – ratified after the Brazil-Portugal treaty – which contains such a provision. Article 13(3) of the Brazil-Israel tax treaty provides that should a company resident of a contracting state sell or transfer shares in a company of the other contracting state, then this company may be taxed in the other contracting state only if the company resident in the first contracting state owned 10% of the voting rights at any time in the 12 months before the transfer/sale of shares. In such case, the treaty provides, the tax rate shall not exceed 15%.

—Jack Taylor is an LLM candidate at the University of Minho, Braga.