Qualification of Services Under Double Tax Treaties in Brazil: Open Issues After Iberdrola Case

Abstract

This article analyses the discussion regarding the tax assessment of Withholding Income Tax (WHT) on service fees paid from Brazil to other countries that have entered into a Double Tax Treaty with it. Mainly, after the judicial precedent known as Iberdrola case, the Brazilian Superior Court of Justice (STJ) left without analysis several issues that may play a role against future discussions on the qualification of such income under the treaty, namely the possible application of Article 12 and Article 14 to such stream of income. Although the Iberdrola case was favourable to taxpayers, since it applied Article 7 to prevent Brazil from levying the WHT of service payments from Brazil to Spain, it has failed to discuss if the technical service fees would be qualified under Royalties – due to specific protocol stating so – or Independent Personal Services – due to specific wording of the Double Tax Treaties (DTTs) entered into by Brazil. Due to this short-sided view of Brazilian courts, taxpayer should be aware that the precedents on the matter so far left out important issues to be examined, which can be crucial in case of a shift of position on the subject, in the near future.