The Brazil-UAE Double Tax Treaty (DTT) came into force on January 1, 2022. The Treaty holds substantial significance for companies and individuals involved in international business dealings spanning both nations. This article explains the Treaty’s key provisions and implications, highlighting its uniqueness, in comparison to other double taxation treaties (DTTs) signed by the UAE.
Key Considerations of the Brazil-UAE Double Tax Treaty (DTT):
The key considerations for Double Taxation Treaties (DTT) are given below: -
Incorporation of the OECD Model
The Double Taxation Treaty between Brazil and the UAE draws heavily from the OECD Model Tax Convention, aligning it with international standards for tax treaties. This approach ensures consistency and predictability in tax treatment between the two nations.
Exchange of Information
The treaty establishes a framework for the exchange of information between Brazil and the UAE. This provision enhances transparency and cooperation in combating tax evasion and avoidance.
Challenges with Domestic Legislation
Despite the treaty's provisions, potential conflicts may arise concerning its applicability within the context of Brazilian domestic legislation.
Key Features of the UAE Double Tax Treaty:
Alignment with OECD Model
The treaty largely follows the framework of the OECD Model Tax Convention of 2017 (MTC 2017), incorporating several recommendations related to Base Erosion and Profit Shifting (BEPS) as outlined by the OECD. It is essential to note that this treaty does not fall under the purview of the Multilateral Instrument (MLI), despite the UAE signing the MLI earlier.
To qualify as a resident of the UAE under the treaty, a company must meet specific conditions which include:
- Establishment within the UAE.
- A place of effective management in the UAE.
- Capital that is beneficially owned and controlled (directly or indirectly) by the UAE, government institutions of the UAE, political subdivisions, local governments, or individuals who are residents of the UAE, specifically UAE nationals domiciled in the UAE.
Situations involving dual residency
This treaty addresses cases where a company is considered a resident in both the UAE and Brazil. In such cases, the company will not be considered a resident of either country and, consequently, will not be eligible for treaty benefits. This departure from the MTC 2017 and the MLI, which determine a company's residence based on the location of its effective management or through a determination by the competent authorities, is a notable feature of this treaty.
Permanent Establishment (PE) Clause
The treaty incorporates PE definitions that align with the BEPS Action 7 recommendations. These provisions address concerns related to the artificial avoidance of PE status and include considerations such as commissionaire arrangements, expanded agency PE scope, clarifications on independent agents, closely related enterprises, and specific activities. Notably, these provisions aim to prevent tax avoidance and ensure that appropriate tax obligations are met.
Taxation of capital gains
Unlike several recent treaties involving the UAE, this treaty takes a distinct approach to tax capital gains.
Benefits entitlement (Article 29)01
This article is included to combat tax evasion and avoidance facilitated by treaty-shopping practices. It features the Principal Purpose Test (PPT), aligning with the minimum BEPS standard under the MLI. Additionally, it requires a base-erosion test to be satisfied, demonstrating that up to 50% of gross income is not used (directly or indirectly) to settle obligations, including interest and royalties, to individuals not entitled to treaty benefits. Importantly, the treaty specifies that being entitled to benefits does not prevent a contracting state from applying its domestic anti-tax evasion and avoidance laws.
Other Notable Provisions of the Brazil-UAE Double Tax Treaty (DTT)
The treaty includes several other key provisions, such as:
- A 'Fees for Technical Services' article.
- An independent personal services clause.
- Principles for avoiding double taxation through the foreign tax credit method.
- Fulfilling BEPS standards: This agreement adheres to the minimum standards of BEPS by introducing a mutual agreement procedure
Implications and Future Outlook of Brazil-UAE Double Tax Treaty (DTT)
The Brazil-UAE Double Tax Treaty has important implications for businesses and individuals engaged in cross-border transactions between these nations. Notably, the treaty's provisions aim to provide clarity and consistency in tax treatment while preventing double taxation. However, some uncertainties remain, particularly concerning the application of these provisions in the context of Brazilian domestic legislation. Brazil's classification of the UAE as a tax haven has led to specific tax treatment of transactions with UAE residents, including withholding taxes and other measures. The signing of the treaty may lead to a change in the UAE's blacklisted status, which, in turn, could impact the taxation of income for UAE residents in Brazil. Yet, until such changes occur, Brazilian tax authorities may maintain their existing interpretation.
In summation, for a UAE company to benefit from the treaty, it must meet specific residency criteria, satisfy the Principal Purpose Test, and adhere to the 50% base erosion test. These criteria are essential for obtaining treaty benefits.
Read More: Singapore-UAE Double Tax Treaty