Brazil’s Superior Court of Justice issues decision exempting payments of services to Spain from withholding tax in Brazil
In the context of a series of recent developments on the tax treatment of cross border services payments from Brazil, the Superior Court of Justice (STJ) recently ruled that payments for services performed by a Spanish company without permanent establishment in Brazil are not subject to withholding income tax in Brazil in accordance with Article 7 of the double taxation treaty between Brazil and Spain.
Under Article 7 of the treaty, an entity’s country of residence is exclusively entitled to tax the entity’s business profits when the entity does not have a permanent establishment in the other country.
The STJ considered whether the treaty should prevail over Brazilian domestic rules and what “profits” means. According to the decision, the provisions of tax treaties should prevail over Brazilian rules and should be interpreted in line with the Organisation for Economic Co-operation and Development standards, even if Brazil is not a member of said organization. In this regard, the term “profits of an enterprise” means the operational profits of the company that are derived from activities, either regular or ancillary to the corporate purpose of the company, including the income paid for services. Therefore, because of Article 7 of the treaty and the fact that the service provider was a tax resident in Spain without permanent establishment in Brazil, no withholding income tax could be charged in Brazil on the payment for the services.
Although the latest discussions on the taxation of cross border remittances for services were focused on the difference between technical and non-technical services, the STJ did not analyze the nature of the services. The decision only states, with no further detail, that the services in the case were non-technical consulting services. The nature of the services is a relevant issue because several treaty protocols signed by Brazil establish that payments for technical services are in the scope of the article concerning royalties (generally Article 12).
The STJ decision also did not take into consideration Declaratory Act No. 5/2014 under which payments for services are only exempt from withholding income tax under Brazilian tax treaties when they are not classified as: (i) royalties under Article 12 of the treaties; or (ii) professional services under Article 14 of the treaties.
Even though the decision is not binding for taxpayers in a similar situation, it confirms the previous decision of the STJ on this issue and it is a positive precedent on the application of Article 7 in Brazil.
