Fernanda Calazans and Leonardo Andrade, partners at Velloza & Girotto
|Velloza & Girotto
Av. Paulista, 901
17º & 18º Andares
01311-100 São Paulo, SP Brazil
Telephone: +55 11 3145 0055
Fax: +55 11 3145 0050
Visit website: www.vellozaegirotto.com.br/english
Banks are a significant presence among non-resident investors in the Brazilian financial and capital markets under National Monetary Council Resolution 2,689/2000.
Many of them trade in local over-the-counter (OTC) derivatives and, likewise non-bank investors, income made thereunder is subject to withholding tax at a rate of 10%.
This is unless it can be shown that an applicable double taxation treaty provides otherwise. This was precisely what a Spanish bank set out to do in reliance on the 1974 treaty between Brazil and Spain (DTT).
Per a formal consultation submitted by it to the Brazilian federal tax authorities (RFB) in 2005, the Spanish bank sought to have recognised that income from its derivatives trading in Brazil should be classified under the DTT as business profits, rather than as other income.
The implication of this was that if income from the Spanish bank’s derivatives in Brazil qualified as business profits the authority to tax it would rest solely upon Spain since the bank had no permanent establishment in Brazil. Conversely, if such income was to be treated as other income, Brazil could choose to tax it as well.
The Spanish bank reasoned that, in contrast with a nonbank, when it came to banks there could be no question that derivatives trading was a core activity and, therefore, income from it fell squarely within the scope of business profits (in much the same way as, for instance, income from exploration, production and refining are core to a petroleum enterprise).
RFB would not view things in this light, however, and in its response to the bank’s consultation maintained that, in the absence of any express exclusion to the contrary under the DTT, derivatives income constituted “other income” thereby triggering the 10% WHT provided by Brazilian domestic law.
In 2007 the bank looked to the courts for relief. After meeting with the denial of the lower federal court SB appealed to the 3rd Region Federal Court of Appeals (TRF3). In March 2012, TRF3 expressed disagreement with the lower court and reversed.
By unanimous decision, TRF3 ruled that insofar as in Brazil tax treaties override domestic tax legislation, the bank’s derivatives income was indeed business profit and, accordingly, Spain alone had the power to tax it. To hold otherwise, it noted, would defeat the stated purpose of the DTT to prevent business profits from being taxed by both states.
The firm represented the bank throughout the entire process. Though RFB can be expected to move to have the case heard by the Federal Supreme Court, there is little likelihood that TRF3’s position will fail to be upheld. Banks from a country party to a treaty with Brazil containing similar provisions now have a strong precedent to build a case along the same lines.
LL.B. from Universidade Presbiteriana Mackenzie in 1999. Specialization in Tax Law at Instituto Brasileiro de Direito Tributário ("IBDT") and Instituto Brasileiro de Estudos Tributários ("IBET"), in 2002. Currently doing LLM in Capitals Market at Centro de Estudos de Direito do Instituto Brasileiro de Mercado de Capitais - IBMEC Law.
Former intern at a major Brazilian law firm. Former Consultant of the Tax Department of an important European multinational auditing and consulting company in the area of International Tax. Former tax consultant of the Tax Department of another major Brazilian law firm.
Practice Areas: Tax - Direct Tax
Languages: Portuguese and English
Bachelor Degree in Law by Universidade Mackenzie. Postgraduate degree in Tax Law by INSPER ("IBMEC-SP").
Practice Areas: Litigation
Languages: Portuguese and English