Newly signed Brazil-Uruguay tax treaty will force companies to review structures

By Francisco Lisboa Moreira, Bocater, Camargo, Costa e Silva, Rodrigues Advogados

Brazil continues to expand its treaty network in the context of its ascension to the OECD.

On June 7, Brazil and Uruguay signed a tax treaty and protocol placing some important marks on the longstanding relationship between the two South American partners.

Uruguay has always been a very important jurisdiction for Brazilian companies holding foreign investment and for Brazilian wealthy individuals’ offshore structures.

The Brazil–Uruguay tax treaty represents a change and its negotiation was probably motivated by Brazil´s threat to blacklist Uruguay for tax purposes. Because of that, Brazilian companies and individuals should review their offshore structures with much more caution.

We may highlight the following:

Ineffective taxation

According to item 2 of the protocol, one contracting party will be entitled to tax the business profits of the other contracting entity if such entity does not tax such profits effectively.

This seems to be a request of the Brazilian authorities to enable the application of the Brazilian worldwide taxation regime. However, if one country waives its taxing rights by means of a territorial regime will it trigger the clause? This question will likely be faced by taxpayers.

Treaty shopping

A very broad “Entitlement to Treaty Benefits” clause was included (art. 29) of the Brazil-Uruguay tax treaty.  As Uruguay possesses a territorial taxation regime, with proper planning Brazilian entities could benefit from a pass-through regime.

Article 29 specifically mentions that the benefits of the tax treaty will not be extended to entities “operating as a holding company”, “providing general supervision or administration of a group of companies”, “Providing group financing (including group cash flow management – cash pooling),” or “performing or managing investments, unless those activities are conducted by a bank, insurance company, or registered securities trader in the course of its regular business.”

Tax residency

The residency article specifically mentions, in article 4, item 2, the conditions for an individual to be resident of one of the two contracting states.

This article should be interpreted in alignment with the Uruguayan tax residency rules including for Brazilians possessing “centers of economic interests” in Uruguay.

Dividends, interests, royalties, services fees

Articles 10, 11 and 12 provide that, for dividends, interests and royalties, the taxing rights are split. This is important in the context of the probable Brazilian tax reform to introduce a dividend withholding tax.

Aligned with Brazilian policy to push service fees away from article 7 (Business profits in the OECD model) article 13 on technical services fees was included in the treaty, pursuant to article 12A of the UN Model Convention.

Exchange of information

Very much in the context of the global transparency efforts, the new Brazil-Uruguay tax treaty includes a new exchange of information article. The limitation on using the information for tax purposes will need to be followed closely, specifically in the context of the recent amnesty regimes granted by Brazil for undisclosed offshore accounts.

For the treaty to enter into force, it still must be approved in both countries.