Search for:

In brief

On 7 September 2022, Brazil and the UK issued a joint declaration announcing the intention to start negotiating a double tax convention (“Treaty”). This announcement came off the back of a number of years of discussion to progress both policy and technical issues – hence the Treaty was able to be signed on 29 November 2022, within three months of that announcement. The Treaty has not yet entered into force – this will happen upon completion of the legal procedures required by both countries, but it is not yet clear how long this will take.

The entry into a double tax treaty by the UK and Brazil is an important and welcome development which will affect many multi-national groups, particularly those providing services in the UK. We would recommend multinational groups, wherever they are headquartered, revisit various supply chains, holding company and investment structures to optimise the opportunities the new treaty presents.

The Treaty in more detail


In general, the Treaty reduces rather than eliminates withholding taxes on dividends.

The Treaty rate is capped at 15%, unless the beneficial owner of the dividends is a company which has held a direct interest of at least 10% in the capital of the payer for 12 months, in which case the maximum rate under the Treaty is 10%.

The Treaty rate is also limited to 15% for dividends paid out of income (including gains) from immovable property by investment vehicles having REIT type characteristics. Dividends paid to pension schemes do, however, qualify for a full exemption from source country dividend withholding tax.

Currently there is no withholding tax on dividends as a matter of domestic law in either the UK or Brazil, but the Treaty may become relevant and attractive in the scenario where a contemplated tax reform in Brazil comes to fruition, establishing withholding tax on dividends distributed by Brazilian companies to non-residents. This law change has been awaiting a Brazilian Senate vote for some time but if implemented could see the introduction of a withholding tax at a rate of 15-20%.  

The Treaty also includes an unusual provision that cannot be found in the dividend article of either the 2017 OECD Model Tax Convention on Income and on Capital or the 2021 United Nations Model Double Taxation Convention between Developed and Developing Countries. Under Article 10(5) of the Treaty, if a resident of one Contracting State has a permanent establishment in the other Contracting State, that other Contracting State is permitted to levy a withholding tax, up to a maximum rate of 10%, in respect of the post-tax profits of that permanent establishment.


Withholding tax on interest payments are capped at 7% in the case of long-term (at least five years) infrastructure financing, 10% for other bank loans, bonds traded on a recognised stock exchange and sales on credit of machinery and equipment, and otherwise at 15%. As with dividends, pension schemes also benefit from an exemption from withholding tax on interest in the payer’s Contracting State.

With Brazil now increasing the handful of jurisdictions whose treaties with the UK do not fully exempt withholding tax on interest, we may see groups wishing to invest in the UK considering in more detail the potential availability of the often overlooked qualifying private placement (QPP) exemption in order to eliminate the residual UK withholding tax under the Treaty. The QPP exemption requires only that a lender (who must not be connected to the borrower) is resident in a treaty jurisdiction with a non-discrimination article before it provides a complete domestic law exemption from UK withholding tax on interest, even in circumstances where that same treaty would only reduce and not eliminate the withholding tax suffered. The Treaty includes a non-discrimination article and so perhaps we will see parties to financing arrangements exploring the QPP exemption further than has historically been the case.


The Treaty caps the rate of withholding tax on royalties at 10%. Most double tax treaties signed by Brazil provide for a 15% rate, with some exceptions being subject to a 10% rate. The Treaty is therefore more beneficial in this respect in establishing a 10% rate for all types of royalties.

Fees for technical services

Unlike most of Brazil’s existing double tax treaties, and in line with the most recent Brazil treaties entered into with Switzerland and Singapore, the Treaty has a specific article (Article 13) regulating technical services and permitting taxation at source on payments for managerial, technical or consultancy services. The Treaty is innovative, however, in that it reduces the withholding tax rate to 8% during the first two years of its entry into force, 4% during the third and fourth years and 0% after the fourth year. Furthermore, with reference to Article 13, the Protocol to the Treaty states that if Brazil agrees on lower rates on technical services with any other OECD member country (except Latin American jurisdictions), such lower rates will automatically apply under the Treaty. These clauses reflect an important change in Brazil’s tax position and give rise to opportunities for groups to revisit the structure of their supply of services in the UK.

Article 13 is based on Article 12A of the UN Model Tax Convention. Article 12A was added to the UN Model Tax Convention in 2017 to allow a Contracting State to tax fees for certain technical services paid to a resident of the other Contracting State on a gross basis at a rate to be negotiated by the Contracting States. Ordinarily the fees paid by Company A to Company B for services would be deductible by Company A in computing its income subject to tax by Country A. This deduction reduces the tax base of Country A and, before the adoption of Article 12A, Country A would not have been able to impose tax on the payments by Company A to Company B to offset the effect of the deduction. However, under Article 12A, if fees for technical services were paid by a resident of Country A or a non-resident of Country A with a permanent establishment or fixed base in Country A, Country A would be entitled to tax those fees. The base erosion and profit shifting illustrated here raise concerns for both developed and developing countries. However, the problem is more acute from the perspective of developing countries, because they are disproportionately importers of technical services and often lack the administrative capacity to control or limit such base erosion and profit shifting through anti-avoidance rules in their domestic law and tax treaties.

The OECD/G20 BEPS Project, Action 1 (Addressing the Tax Challenges of the Digital Economy) illustrates the difficulties faced by tax policy makers and tax administrations in dealing with the new business models made available through the digital economy. The OECD Report did not recommend, for the time being, a withholding tax on digital cross border services, however, it was recognized that countries were free to include such provisions in their tax treaties. The UN Model Tax Convention, therefore, goes further than the approach taken under the OECD Model Tax Convention, which does not include an article governing taxation rights in the context of payments for technical services. The treatment of withholding taxes continues to be a key political issue as the OECD Inclusive Framework works to refine the proposed Amount A rules under Pillar One, with developing countries asserting that where Pillar One is adopted there should be both the new market country taxing rights and the old market country withholding taxes.

Transfer pricing

The Treaty also gives rise to two not insignificant differences from both the UN and OECD Model Tax Conventions, which make it harder to obtain a corresponding adjustment (to decrease the taxable profits of an enterprise in one Contracting State) where an associated enterprise has been assessed additional taxable profits in the other Contracting State as a result of an adjustment in respect of a non-arm’s length transaction between the enterprises.

Firstly, corresponding adjustments shall be made only in accordance with the mutual agreement procedure, which does not permit that issues on which the competent authorities cannot agree can be referred to arbitration. Secondly, where the competent authorities can reach agreement, the Treaty provides that such agreement shall be implemented notwithstanding any time limits in the domestic law of the Contracting States, but disapplies this provision in relation to corresponding adjustments – providing that a “Contracting State is not required to make a corresponding adjustment…after the expiry of the time limits provided in its domestic law”.

It is also noteworthy that no mutual agreement procedure is possible under the Treaty in cases where the transfer pricing adjustment in question arises as a result of negligent conduct. 

From a UK perspective, these are unhelpful deviations from the UN and OECD Model Tax Conventions. From a Brazilian perspective, however, Article 9 constitutes another innovation of the Treaty in contrast to Brazil’s existing tax treaties by granting corresponding transfer pricing adjustments through mutual agreement procedures. Historically, Brazil has always refused the commitment to apply corresponding transfer pricing adjustments due to the transfer pricing system currently adopted by Brazilian legislation. The wording of Article 9 of the Treaty is a significant step in the right direction for bringing Brazil’s treaties more in line with the OECD guidelines.

Capital gains

Article 14 governs, among other things, the allocation of taxing rights in respect of capital gains derived by a resident of a Contracting State arising from the sale of shares in a company resident in the other Contracting State.

The Treaty provides that gains derived by a resident of a Contracting State that arise in the other Contracting State from the disposal of any property or right (other than those in respect of ships or aircraft) may be taxed in the other Contracting State.

Residence and entitlement to benefits

The Treaty does not include a residence tie-breaker provision for companies. Under Article 4(4), residence will be determined through competent authority mutual agreement and, in the absence of such agreement, the taxpayer will only be entitled to relief under the Treaty to the extent agreed between the authorities.

The application of the Treaty is generally limited to “qualified persons”. Companies whose principal class of shares is regularly traded on a recognised stock exchange and their 50% subsidiaries would qualify. Companies which are not “qualified persons” may still be entitled to benefit if they are at least 75% owned by equivalent beneficiaries. This is consistent with the Simplified Limitation on Benefits Provision of the Multilateral Instrument.

UK companies with an active business in the UK are entitled to the benefits of the Treaty with respect to Brazilian source income emanating from, or incidental to, that business (and vice versa) even if they are not qualified persons or owned by equivalent beneficiaries.

The Treaty takes a number of positions which clearly well place the UK as a holding jurisdiction of choice for Brazilian resident companies. We are undertaking a deep dive review into the Treaty to assess the extent to which its terms may place the UK at or near the top of the list as the most favourable counterparty jurisdiction for Brazilian resident entities. We would be very happy to discuss the opportunities and efficiencies that may have been created by the Treaty for your structure. Please do get in touch with our team.


Alistair Craig is a partner in Baker McKenzie's London office where he leads the Transaction Tax team. Before joining the Firm in 2013, Alistair worked in the transaction tax and international tax services groups at Ernst & Young.


Patrick O'Gara is a partner in Baker McKenzie's Corporate Tax department in London.


Holly Bradley is a Senior Knowledge Lawyer in Baker McKenzie, London office.

Write A Comment