Developments in the international taxation and the business relation Brazil-Austria. May 2017, Vienna, Austria.

1. Updates on the Double-Taxation
Convention between Austria and Brazil
Current Legal and Tax Issues
In Cross-Border Transactions
Brazil - Austria
Vienna, 31. May 2017

2. 3.
Austrian
Holding
Companies
1.
Bilateral
Affairs
Austria/Brazil
2.
Tax Policies
of Brazil
4.
Developments –
International
Tax Matters

3. • Last decade, bilateral
commerce achieved its
highest level: US$ 1.898
billion (FOB) p.a.
1. Bilateral Affairs
3

4. Many Brazilian companies have been using Austria as base for operations in the
European market and/or has constituted holding or trading companies with the objective
of centralizing in Austria financial and commercial operations.
2010 2011 2012 2013 2014 2015
KUSD % KUSD % KUSD % KUSD % KUSD % KUSD %
37,092 21.9 47,390 24.6 56,618 22.9 66,549 24.4 48,056 17.8 38,756 14.9
• The bilateral relationship is more relevant in direct investments:
In 2014, direct investments of Austria in Brazil were only below the
historically highest investors (ca. USD 1.8 billion).
1. Bilateral Affairs
4

5. 3.
Austrian
Holding
Companies
1.
Bilateral
Affairs
Austria/Brazil
2.
Tax Policies
of Brazil
4.
Developments –
International
Tax Matters

6. 2. Tax Policies in Brazil
• Is the Brazilian tax system complex?
• Do the Brazilians [businessmen, advisors, accountants, tax
authorities, judges etc.] really understand their tax system?
• Should I rely on an answer received from my consultant last
year? Last month? Yesterday? This morning?

7. • Brazilian tax legislation is extremely
complex:
- Constitution is very broad regarding
taxes;
- Federal Government, States and
Municipalities have taxing power
[legislative and administrative];
- System is overregulated and laws are
poorly formulated and enacted;
- Taxpayer is many times treated by tax
administration as “enemy”;
- Unnumbered ancillary obligations;
- Lack of a judicial system specialized in
tax laws enhances the uncertainty of
the taxpayer.
2. Tax Policies in Brazil
• In order to face raising expenses, the
Government does not implement
efficiency to the administration or
qualitative reduction of expenses: !!!
They raise taxes and fines !!!
7

8. • Inversion of the taxation on income to consume taxes [indirect
taxation]; perverse effects:
2015 38%
2. Tax Policies in Brazil
Brazilian Federal Revenue Statistics 2014
8

9. Revenue Statistics 2014 - © OECD 2014 9
2. Tax Policies in Brazil

10. 3.
Austrian
Holding
Companies
1.
Bilateral
Affairs
Austria/Brazil
2.
Tax Policies
of Brazil
4.
Developments –
International
Tax Matters

11. • In September 2016, the Brazilian Federal Revenue included within the list
of privileged tax regimes (grey list), the companies set up as “holdings”
under Austrian legislation.
• Under Brazilian law, privileged tax regimes are those that present at least
one of the following characteristics:
3. Austrian Holding Companies
3.1 Inclusion in the Grey List
1. the income is not taxed or it is taxed at a maximum rate lower than 20%*;
2. an advantageous tax treatment is granted to non-residents:
a. without requiring the performance of substantial economic activities in the
respective country;
b. conditioned to the non performance of substantial economic activities in the
respective country;
3. the income earned outside of its territory is not taxed or is taxed at a
maximum rate lower than 20%*;
4. the information access regarding shareholding composition, ownership of
property or rights or economic transactions performed is refused.
* With regard to items 1 and 3, in case those regimes are aligned with international standards of fiscal transparency,
according to Brazilian Federal Revenue, tax rate will be reduced to 17%, as prescribed by Ordinance MF No. 488/2014.
11

12. • Consequences:
a. automatic application of transfer pricing and thin capitalization rules;
b. reduction of the equity-debt ratio for thin cap purposes – 30% instead of 200%;
c. additional limitation to the deductibility of payments to Austria;
d. taxation of profits of the holding companies in Austria on December
31, regardless of its characterization as controlled company and of the
deferred payment system (payment in installments over a period of up
to 8 years);
e. prohibition of the use of the presumed tax credit of 9% (Law No.
12,973/2014);
f. no consolidation of foreign profits and losses exclusion by the holding
company and its invested companies;
g. raise of the WhT to 25% over the payments for freight, rental of ships, boats
containers etc.
3. Austrian Holding Companies
3.1 Inclusion in the Grey List
12

13. • In December 2016, the inclusion was limited to “holding companies” that
do not have “substantial economic activities”;
• However, the requisites are considerably generic and vague:
§ operational capacity appropriated to its purposes;
§ existence of employees qualified in a sufficient number;
§ physical facilities appropriated to the exercise of management;
§ effective decision-making related to: (i) development of activities with purpose
of obtaining income from their assets; (ii) the management of corporate shares
with purpose of obtaining income derived from profit distribution and capital
gain.
3. Austrian Holding Companies
3.1 Inclusion in the Grey List
13
• Multilateral Convention on Mutual Administrative Assistance in Tax
Matters – legal ground for the exchange of information as per OECD;
• Art. 26 DTC: as is “small clause of information”; but Austria has already
expressed its disposal to implement “extensive clause of information”.

14. 3. Austrian Holding Companies
3.2 Operational capacity appropriated to its purposes
14
• Based on our experience, we could point out some practical aspects to comply
with the Federal Revenue requirement “operational capacity appropriated to its
purposes”:
A. Existence of employees qualified in a sufficient number
• Management members should be resident in Austria. Documents as
“Anmeldebestätigung” in an Austrian city, visa, registers in some basic services
(gas, energy, land line, insurance etc.) etc. can be used as proof.
• The holding shall have employees registered as such in its payroll. The company
should avoid outsourcing its main activities or hire ‘consultants’ or ‘part-time
service providers’ for key positions. Since we are dealing with a holding
company, an accountant, financial expert, business administrator etc. are some
examples of adequate professionals. These shall have also past experience in the
positions. Documents could be the payroll, payslips, the articles of association if
applicable, the employment contracts, CVs and the formal registry of the
employees with the local social security.

15. 3. Austrian Holding Companies
3.2 Operational capacity appropriated to its purposes
15
• There must be a nexus between the activities and the CV/Experience of the
workers: e.g. not appointing a lawyer as the accountant, or someone with no
formal university/technical education or different carrier experience in a
management position.
• The remuneration must be compatible with the function of the employee. The
same documents named above are sufficient to evidence it.
• The number of the employees may vary depending on the size of the company
and activities: revenue, complexity of the corp structure etc. There is no formula
to appoint the adequate number. This is a matter of reasonability.
.

16. 3. Austrian Holding Companies
3.2 Operational capacity appropriated to its purposes
16
B. Physical facilities appropriated to the exercise of management
• Since it is usual to these capital management companies or corporate service
providers to offer an address to their clients, many times this is a small room
where dozens, hundreds, of companies have their address. Generally, where
these service providers are also located.
• The Federal Revenue is looking for
companies developing real activities in
adequate and proper facilities. The
size of the facilities shall be
proportional to the number of the
employees and the development of
the activities. The proof can be a lease
contract, registry in a notary, land
book, real estate book, print of the
property, photos of the facilities etc.

17. 3. Austrian Holding Companies
3.2 Operational capacity appropriated to its purposes
17
C) effective decision-making related to: (i) development of activities with purpose of
obtaining income from their assets; (ii) the management of corporate shares
with purpose of obtaining income derived from profit distribution and capital
gain
Decisions-making locally, including
strategically decisions by the
directors.
Some examples:
Evidences (documents) of physical
presence in the local and local
deliberations.
Meeting of the shareholders in the
local, validly summoned.
Documents, books, contracts, bank
accounts etc.
Resolutions, flight tickets,
hotel invoices etc. could be
used as proof..
Proof through Resolutions etc.
Resolutions might not be only
stamped.
See the possibility of
registering them.
Everything shall be produced
(as much/many as possible)
and stored locally.

18. 3.
Austrian
Holding
Companies
1.
Bilateral
Affairs
Austria/Brazil
2.
Tax Policies
of Brazil
4.
Developments –
International
Tax Matters

19. Some selected points:
• New approach of the Federal Revenue about the taxation on imported
services;
• CSLL is now part of the DTC from a Brazilian perspective;
• Capital gains: as of 2017, gains obtained by resident individuals and foreign
investors are subject to progressive rates from 15% (gains up to BRL 5M) to
22.5% (gains above BRL 30M), while until the end of 2016 the applicable
rate was 15%;
• Amnesty: Brazilian residents with undeclared assets abroad;
• Transparency and anti-avoidance rules: FATCA, Global Forum, Multilateral
Convention on Mutual Administrative Assistance in Tax Matters, TIEAs etc.;
• Inclusion of Austrian “holdings” in the grey list, resulting in tax impacts
over the transactions between both countries.
4. Developments - International Tax
4.1 Summary / Main Points
19

20. • 2005: Germany terminated the DTC with
Brazil, among others because of this
interpretation of the convention;
• 2013: Finland threated to terminate the DTC
with Brazil, because of this interpretation of
the convention.
4. Developments - International Tax
4.2 Imported Services
Technical services
w/ technology
transfer
Technical services
w/o technology
transfer
+
Article 12
Royalties
Article 21
Other Income
Position of the Brazilian Federal Revenue up to June/2014:
20
Services in general

21. Technical
services*
irrespective
whether w/ or
w/o technology
transfer
Services in
General
Residual technical
services
Article 12
Royalties
Article 14
Independent
Personal Services
Position of the Brazilian Federal Revenue from June/2014 on:
Protocol to DTC includes
tech. serv. in the
concept of royalties
Professional services /
activities of an
independent character
Article 7
Business Profits
*“Technical services: services which execution either rely on specialized technical knowledge,
involve administrative assistance or consulting services performed by independent
professionals or companies, or rely on automated means with clear technological content”
4. Developments - International Tax
4.2 Imported Services
21

22. Services Payments for the services
Services
1. Technical Services
WhT 15% Service provider
ISS 2%-5% Service provider
CIDE-Contrib. 10% Service taker
PIS/COFINS 9.25% Service taker
IOF 0.38% Service taker
Deductibility of the payments in case of transfer of
technology: max. 1% - 5% of the net revenue from the
sales with products manufactured through the
technology transferred.
In case of technical services without technology transfer,
the deductibility is allowed if these are necessary and
usual.
2. Services in General
WhT 25% Service provider
ISS 2%-5% Service provider
PIS/COFINS 9.25% Service taker
IOF 0.38% Service taker
The deductibility is allowed if these are necessary and
usual.
Taxes:
Taxes Tax rates Taxpayer
Withholding Income Tax - WhT 15% / 25% Service provider
Tax on Services - ISS 2% - 5% Service provider
CIDE-Contribution 10% / 0% Service taker
Social Contribution - PIS 1.65% Service taker
Social Contribution - COFINS 7.6% Service taker
Exchange Tax - IOF 0.38% Service taker
Taxation on Payments for Imported Services
4. Developments - International Tax
4.2 Imported Services
22

23. 4. Developments - International Tax
4.3 CSLL
• Social Contribution on Net Profits (CSLL) is now part of the DTC from a
Brazilian perspective (Law n. 13,202/2015):
• Article 23 (2) of the DTC:
Art. 11. For interpretation purposes, international treaties and
conventions signed by the Government of the Federal Republic of Brazil
to avoid double taxation on income include CSLL.
2. Dividends paid by a company which is a resident of Austria to a
company which is a resident of Brazil and which holds at least 25 per
cent of the capital shares of the company paying the dividends shall be
exempt from the corporation tax in Brazil.
23

24. 4. Developments - International Tax
4.4 Capital Gains
Capital gains range WhT rate
Up to BRL 5 million 15%
BRL 5 million to BRL 10 million 17.5%
BRL 10 million to BRL 30 million 20%
Above BRL 30 million 22.5%
• Since 1.1.2017, the income tax of residents abroad over capital gains
from transactions with assets located in Brazil has a progressive
character:
Article 13 (3) of the DTC: capital gains from
transactions with corporate participation are
taxable in both countries
!!!
24

25. Amnesty: residents in Brazil with undeclared assets abroad (shares,
immovable properties, capital etc.).
Benefits – waiving criminal consequences, administrative fines (exchange
regulations) and heavy tax penalties (fines between 150% and 225%) and
possible maintenance of the assets abroad.
Requisites – a.o. assets/income from licit origin, payment of flat tax of 15%
and a fine of 15% over the value of the assets on 31st December 2014.
4. Developments - International Tax
4.5 Amnesty
Income or capital? DTC applicable? Article 22 applicable in
some extent?
25

26. • Brazil signed and implemented the Foreign Account Tax Compliance Act –
FATCA;
• Brazil has a network of 44 agreements involving the exchange of
information – 34 DTCs and 10 Tax Information Exchange Agreements
‘TIEAs’, 32 of which are in force. The country increased the signing of TIEAs,
especially in the last couple of years;
• Brazil is a member of both the Steering and Peer Review Groups of the
OECD Global Forum on Transparency and Exchange of Information for Tax
Purposes;
• Brazil signed the Multilateral Convention on Mutual Administrative
Assistance in Tax Matters. Brazil is not an “early adopter”, but will
implement it in 2018 seeking for infos of 2017 (expected);
• Equity-pick-up method (transparency) to foreign controlled companies.
4. Developments - International Tax
4.6 Transparency
26

27. Vielen Dank für Ihre Geduld!
Dr. Paulo César Teixeira Duarte Filho, LL.M
Partner
pduarte@rothmann.com.br