Revisiting Volvo in Light of the Nondiscrimination Provision in article 24 of the Brazil-Sweden Tax Treaty

TAX NOTES INTERNATIONAL, JULY 30, 2018 453
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SPECIAL REPORTS
Revisiting Volvo in Light of the Nondiscrimination Provision
In Article 24 of the Brazil-Sweden Tax Treaty
by Phelippe Toledo Pires de Oliveira
Recently, the Brazilian Supreme Federal Court
(Supremo Tribunal Federal, or STF) included the
long-awaited Volvo case on its schedule, and tax
practitioners and scholars were excited because it is
one of the few cases regarding tax treaties to reach
the Court. Observers expected the Court to decide
Volvo on May 25, but much to their disbelief, the
case was withdrawn from the Court’s schedule the
day before discussions were to resume.
Having started its discussion of Volvo in 2011,
the Brazilian Supreme Court has once again
postponed a decision regarding whether different
tax treatment for dividends paid by a Brazilian
resident to its shareholder in Sweden would
breach Brazil’s laws or constitution. In doing so, it
missed an opportunity to settle the question and
right the Superior Court of Justice’s (Superior
Tribunal de Justiça, or STJ) misinterpretation of
the Brazil-Sweden tax treaty (in effect since 1976).
This article attempts to unravel the convoluted
nondiscrimination clause in tax treaties against
the backdrop of the Volvo case.
I. Volvo and Article 24 of Brazil’s Tax Treaties
In Brazil, any judicial court can examine
constitutional and infraconstitutional issues.
However, the courts hardly ever address matters
involving tax treaties.
1
Seldom has a case
involving a tax treaty reached the Superior Court
of Justice or the Supreme Court, with the high
court having the final say on constitutional
matters. However, because a taxpayer could claim
that whether international law trumps national
law is a constitutional matter, in rare situations a
case involving a tax treaty can find its way to the
Supreme Court.
2
That seems to be what happened
in Volvo.
At issue in Volvo is whether articles 75 and 77
of Law No. 8.383/91 were in accordance with
Brazilian legislation and constitutional law. Those
articles exempted resident entities from
withholding tax on dividends paid to resident
individuals or entities, but did not extend the
same treatment to dividends paid to nonresidents.
The main question is whether a withholding tax
on dividends paid by a Brazilian resident to its
shareholder in Sweden breaches Brazil’s
legislation or constitution, which prevent
discrimination.
Briefly, Volvo argued that different tax
treatment for residents and nonresidents that own
companies in Brazil constitutes unjustified
discrimination. Nonresidents were subject to a
withholding tax of 15 percent on a dividend
payout but residents were not, which it said
violated domestic legislation as well as article 24
of the Brazil-Sweden tax treaty, which prohibits
tax discrimination. Volvo also said the provision
breaches several constitutional provisions —
Phelippe Toledo Pires de Oliveira is a visiting
scholar at the Queen Mary University of
London on leave from the Office of the
Attorney General for the National Treasury in
the Brazilian Ministry of Finance.
In this article, the author argues that in its
decision to exclude withholding tax on
dividends paid out to nonresident
shareholders, the Brazilian Superior Court of
Justice misinterpreted article 24 of the Brazil-
Sweden tax treaty, and he says the Brazilian
Supreme Court should reverse the decision.
1
For an analysis of tax treaties disputes in Brazilian courts, see João
Dácio Rolim and Isabel Calich,“Tax Treaties Disputes in Brazil,” in A Global
Analysis of Tax Treaties Disputes (Vol. 2) 858-904 (2017).
2
Luís Eduardo Schoueri, “Legal Interpretation of Tax Law: Brazil,” in
Legal Interpretation of Tax Law 48-70 (2017).
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SPECIAL REPORTS
454 TAX NOTES INTERNATIONAL, JULY 30, 2018
article 5(2) (the principle of equality); article 150, II
(prohibiting unequal tax treatment); and article
172 (establishing the legal regime of foreign
investments) — as well as different federal legal
provisions, including article 2 of Law No. 4.131/62
(preventing unequal treatment of foreign capital)
and article 98 of the Brazilian Tax Code
(preventing treaty override).
The lower and appellate courts found against
the taxpayer, and in a 3-2 decision, the Superior
Court of Justice overturned those decisions.
3
The
case then went to the Supreme Court, where it
awaits a final ruling.4
The Superior Court of Justice’s decision seems
to have concentrated on the interpretation of the
allegedly violated provisions in light of
constitutional principles. The court was careful
not to overstep its powers, given that it is up to the
Supreme Court to rule on constitutional
questions.
5
What’s more, it largely focused its
attention on one of the most controversial issues
in international taxation: the supremacy of tax
treaties over domestic legislation in accordance
with article 98 of the tax code.
6
However, the court did not analyze in detail
one of the most convoluted tax issues: the
interpretation and scope of the nondiscrimination
provision in tax treaties (in this case, article 24 of
the Brazil-Sweden tax treaty). Also, although the
court addressed the possibility that a country
might treat nonresidents differently from
residents, it barely elaborated on that central
question, focusing instead on side issues, such as
the need for tax treaties to prevent double
taxation.
The superior court ministers confused the
concepts of “resident” and “national,” treating
them as if they are the same. Moreover, those who
sided with Volvo sometimes based their opinions
on article 24(1) (nondiscrimination based on
nationality) and at other times on article 24(4)
(nondiscrimination based on the shareholders’
residence).7
In his opinion siding with Volvo, Minister José
Delgado said tax treatment should not differ for
resident and nonresident taxpayers in the same
situations. In her concurring opinion, Minister
Denise Arruda argued that tax “discrimination
based on the shareholder’s residence and/or
domicile or the company’s headquarters implies
outright breach of the Brazil-Sweden tax treaty.”
The superior court ruled that a 15 percent
withholding tax should not apply to dividends
paid to the Brazilian company shareholder in
Sweden. To demonstrate that the court
misinterpreted the nondiscrimination provision
in article 24 of the Brazil-Sweden tax treaty, the ins
and outs of nondiscrimination in tax matters must
be explained, with emphasis on the types of
nondiscrimination provisions.
II. Nondiscrimination in Tax Matters
Nondiscrimination is a recurring theme in tax
matters. Provisions prohibiting discrimination
can be found in a country’s domestic legislation,
including its constitution, as well as in
international treaties.
8
This section examines
nondiscrimination under Brazilian constitutional
law and the scope of different types of
nondiscrimination in tax treaties. It will review
Volvo once the theoretical basis of
nondiscrimination has been established.
A. Brazilian Constitutional Law
Nondiscrimination is intrinsically associated
with the principle of equal treatment in article 5 of
the Brazilian Constitution, which states, “All
3
Volvo do Brasil Veículos Ltda. v. Fazenda Nacional, Special Appeal No.
426.945/PR (STJ 2004). Ministers Teori Zavascki (reporting for the case)
and Luiz Fux sided with the tax administration, while José Delgado,
Denise Arruda, and Francisco Falcão, who wrote the prevailing opinion,
sided with the taxpayer.
4
Volvo, RE No. 460.320/PR. Of the 11 sitting justices, only Justice
Gilmar Mendes handed down an opinion, voting to overturn the
Superior Court of Justice.
5
According to article 102, III(a) of the constitution.
6
A few tax scholars consider the decision a landmark on the
dominance of tax treaties over domestic legislation; see Sérgio André
Rocha, “Relação entre o Direito Doméstico e as Convenções para evitar a
Dupla Tributação da Renda no Brasil: O Artigo 98 do Código Tributário
Nacional,” 29 RDTA 339 (2013).
7
Nondiscrimination of the debtor based on the creditor’s residence in
article 24(4) was not in the original 1963 OECD model convention. It was
included only on its first review in 1977, after which nondiscrimination
based on ownership or control, and was renumbered article 24(5). See
Section II.B.4 infra.
8
Nondiscrimination provisions can also be found in EU treaty and
trade agreements, like the WTO. For an analysis of the
nondiscrimination clause in the WTO, see William J. Davey, Non-
Discrimination in the World Trade Organization: The Rules and Exceptions
(2012). For an analysis of nondiscrimination in EU law, see Ruth Mason
and Michael S. Knoll, “What Is Tax Discrimination?” 121 Yale L.J. 1014
(2012).

SPECIAL REPORTS
persons are equal before the law, without any
distinction whatsoever.” For taxation, that
principle is set out in article 150, II of the
constitution, which prevents political entities
from establishing unequal treatment for
taxpayers in similar conditions.
According to the nondiscrimination principle,
two people in the same or similar situation should
be treated similarly. However, the concept does
not outlaw providing unequal treatment to
people in different situations, and in fact assumes
that should occur.
One of the major questions regarding the
principle of nondiscrimination is whether the
criteria used to give differential treatment to
taxpayers is reasonable. Any unequal treatment
should consider particular purposes and be able
to achieve them. If the purpose is unjustified,
discriminatory treatment is unreasonable and
unlawful.
9
Accordingly, differential tax treatment
based on ability to pay or line of business in
principle seems reasonable and lawful, while
imposing different tax treatment based on
religious belief or body weight does not seem
reasonable or acceptable.10
B. Tax Treaties
The benchmark for this analysis of
nondiscrimination in tax treaties will be article 24
of the OECD model convention, with reference to
different provisions in the U.N. and U.S. model
conventions.
The nondiscrimination principle in OECD
model article 24 was originally meant to be part of
a multilateral treaty among members of the
Organization for European Economic
Cooperation (OEEC) — which in 1963 ended up
becoming the OECD model convention.11
Updates
to the OECD model in 1977 and 1992 made minor
changes to the provision prohibiting tax
discrimination. The U.N. model includes an
identical provision, and the U.S. model contains a
similar one.12
In general, OECD model article 24 prohibits
discriminatory tax treatment based on nationality
(article 24(1)-(2)) and residence (article 24(3)-(5)).
It does not preclude any and all kinds of
differential tax treatment, however, nor does it
prevent legitimate distinctions. It prohibits
discrimination based on irrelevant criteria in
relation to the treatment.13
In other words, it
prohibits unreasonable and disproportionate
treatment.
OECD model article 24 forbids “open
discrimination”
14
and is not meant to prevent so-
called oblique discrimination. For instance, article
24(1), which prohibits differential tax treatment
based on nationality, does not attempt to prevent
differential treatment based on residence simply
because, indirectly and obliquely, it applies to
foreigners.
According to OECD model article 24(6), the
nondiscrimination provision is not limited by
model article 2, which sets out which taxes are
covered by the treaty. Thus, as a rule, the
nondiscrimination provision applies to any and
all taxes levied by a contracting state and its
political subdivisions. A few countries, including
Brazil, reserve the right to apply that provision
only to taxes covered by the treaty.
15
Finally, the OECD model convention forbids:
• discrimination based on nationality;
• discrimination against stateless persons;
• discrimination of permanent
establishments;
• discrimination against the debtor based on
the creditor’s residence; and
• discrimination based on ownership or
control.
9
Humberto Ávila, Teoria da Igualdade Tributária 43-45 (2009).
10
Kees van Raad, “Não Discriminação na Tributação de Operações
Transnacionais: Escopo e Questões Conceituais,” 19 RDTA 55-56 (2005).
11
John F. Avery Jones, “Understanding the OECD Model Convention:
The Lesson of History,” 10 Fla. Tax Rev. 30-31 (2009).
12
For a comparative analysis of article 24 (nondiscrimination) in the
OECD, U.N., and U.S. model conventions, see van Raad, Materials on
International & EU Tax Law (Vol. 1), at 631-634 (2013-2014).
13
Van Raad, “Non-Discrimination,” Brit. Tax Rev. 43 (1981).
14
Michael Lang, Introduction to the Law of Double Taxation Conventions
143 (2010).
15
Chile, Greece, the United Kingdom, Albania, Argentina, Bulgaria,
Colombia, Malaysia, the Philippines, Romania, Serbia, Singapore,
Thailand, Tunisia, Vietnam, and Ukraine also reserve the right to restrict
the scope of the nondiscrimination provision to taxes covered by the
convention.

SPECIAL REPORTS
Analyzing all of them seems necessary to
understand why the superior court misconstrued
article 24 of the Brazil-Sweden tax treaty and why
the Supreme Court must overturn the decision.
1. Nationality
Although the League of Nations Model
Conventions of Mexico (1943) and London (1946)
had nondiscrimination provisions, they did not
prohibit discrimination based on nationality. The
inclusion of nationality as a criterion for
nondiscrimination in the OECD model
convention was the result of studies conducted by
the OEEC Fiscal Committee.
16
The studies found
that there were cases of discrimination based on
nationality, but it did not seem at the time that the
discriminatory treatment was extensive enough,
especially in OECD countries. Even so,
representatives of OECD member states decided
to include a provision preventing discrimination
based on nationality, supposedly so other
countries could follow its lead. Being aware that a
model like that would be used as a guideline for
non-OECD countries, the OECD hoped the
provision would push countries to prevent
discriminatory treatment to foreigners through
their domestic laws.
17
The provision states that nationals of one
country should not be given less favorable tax
treatment in another country than that country’s
nationals receive. According to model article
24(1), one state cannot subject nationals of another
state to any taxation or related requirement that is
“other or more burdensome”18
than the taxation
and related requirements its nationals would be
subject to in the same circumstances, especially if
based on residence. The provision also applies to
persons who are not residents of one or both
states.
In referring to nationals of a state, the
paragraph appears to prohibit discrimination
based solely on nationality, not residence.
Countries are not precluded from granting
different tax treatment to residents and
nonresidents,
19
and can subject nonresidents to
withholding taxes or higher rates. They cannot,
however, subject nonresident foreigners to higher
taxation than nonresident nationals. They also
cannot grant less favorable tax treatment to
foreign residents than they do to national
residents.
That type of nondiscrimination prevents
foreigners from being subject to taxation or any
related requirements that are higher or more
burdensome than those to which a national is
subjected. Thus, countries cannot levy a different
tax or establish a different tax base or rate for
foreigners. They also cannot deny foreigners tax
credits granted to nationals. The same is true for
ancillary obligations and any other tax-related
formalities (for example, tax assessments, statutes
of limitation, appealing procedures, and tax
records).20
The United States taxes its nationals (be they
U.S. residents or not) based on worldwide
income, granting them credits for taxes paid
abroad. By contrast, foreigners are subject to
taxation based on their worldwide income only
when they are actually resident in the United
States.
21
For that reason, the United States
rephrased article 24(1) of its model convention,
adding that under its legislation its nationals are
not considered in the same circumstances as
nationals of another state. Moreover, it deleted the
expression “other or,” which allows foreigners to
be taxed differently, but not in a more
burdensome way.
22
If not for the wording of article 24(1), which
refers to nationality and not residence, one could
also conclude that the provision does not prohibit
differential tax treatment between residents and
nonresidents because its final part purposefully
uses the phrase “in the same circumstances.”
Thus, taxpayers in similar situations cannot be
treated differently for tax purposes, and their
16
Lang, “Os Trabalhos da OECE e da OCDE para a Criação das
Vedações de Discriminação,” 3 RDTI 221 (2006)
17
Id. at 225.
18
For more on the origin of the OEEC’s Fiscal Committee’s expression
“other or more burdensome taxation or requirements connected
therewith,” see Jones, supra note 11, at 33-34.
19
Kevin Holmes, International Tax Policy and Double Tax Treaties: An
Introduction to Principles and Application 401 (2007).
20
Id. at 403-404. See also commentary on OECD model article 24
(condensed version 2017), at item 15.
21
For an analysis of the U.S. citizen-based taxation, see Mason,
“Citizenship Taxation,” 89 South. Calif. L. Rev. 169-239 (2016).
22
Reuven S. Avi-Yonah and Martin B. Tittle, “The New United States
Model Income Tax Convention,” 61 Bull. Int’l Tax’n 258 (2007).

SPECIAL REPORTS
situations will be equivalent only when their legal
and factual situations are the same.23
Even when the provision did not contain the
expression “in particular with respect to
residence” (introduced in the 1992 update), it was
still possible to grant differential tax treatment to
the residents and nonresidents of a country
because a taxpayer’s residence is not only a
reasonable and acceptable criterion for
discrimination, but also an important factor in
determining whether a taxpayer is actually in the
same circumstances as another one.
2. Stateless Persons
OECD model article 24(2) prohibits
discrimination against stateless persons and is
meant to extend the tax treatment granted to
nationals of contracting states to stateless people.24
The term “stateless person” is to be construed in
accordance with the New York Convention on the
Status of Stateless Persons of 1954: a person who
is not considered a national by any state under the
operation of its law.
The initial idea was to include the prohibition
of discriminatory treatment of stateless persons in
a multilateral treaty.
25
However, during the
discussions that resulted in the OECD model
convention, the decision was made to save that
clause for a bilateral convention. Rumor has it that
the clause was kept in the drafts leading to the
1963 OECD model as a preventive measure in case
nations decided to return to a multilateral model
convention.26
A nondiscrimination provision regarding
stateless persons has always been part of both the
OECD and U.N. model conventions. Under
OECD model article 24(2), stateless persons who
are residents of a state cannot be subject in
another state to any taxation or related obligation
that is different or more onerous than the taxation
or related requirements nationals of that state
would be subject to in the same circumstances,
especially if based on residence.
Because the 1954 New York convention
already ensured that stateless persons would
receive similar tax treatment, article 24(2) could be
considered unnecessary in the OECD model
convention — except it also requires that the tax
treatment granted to nationals apply to stateless
persons excluded from the 1954 convention.
27
The 1954 convention greatly reduces the scope
of model article 24(2), which is relevant in
situations involving nonsignatory countries or if
the convention does not apply (article 1). In fact,
many countries choose not to include a provision
regarding discrimination against stateless
persons in their tax treaties.
28
The 2006 U.S. model
convention does not include it,
29
and Brazil
appears to have used it only once.30
Finally, the provision applies to stateless
persons residing in one of the contracting states;
stateless persons residing in a third state are
generally not covered. However, if states want to
include those persons, they can do so by stating
that the provision applies irrespective of
residence.
31
3. PEs
Model article 24(3) prohibits discrimination
against a permanent establishment of a
nonresident person. Even though observers did
not anticipate that kind of discrimination, it
turned out to be important in the studies by the
OEEC Fiscal Committee, which concluded that
nonresidents were consistently subjected to more
onerous tax treatment than residents were.32
Article 24(3) guarantees PEs of nonresident
enterprises the same tax treatment granted to
resident companies that are in a similar situation.
33
It adds that it should not be construed to require a
state to grant residents of the other state any
23
See commentary on OECD model article 24, supra note 20, at item 7.
24
Lang, supra note 14, at 144.
25
Jones, supra note 11, at 30-31.
26
Lang, supra note 16, at 227-228.
27
See commentary on OECD model article 24, supra note 20, at item
27.
28
29
Avi-Yonah and Tittle, supra note 22, at 258; see also van Raad, supra
note 12, at 634.
30
In a search of Brazil’s tax authority’s website, it appears that of the
33 Brazilian tax treaties in force, only the one with Ukraine contains a
provision forbidding discrimination against stateless persons similar to
model article 24(2).
31
The commentary to the OECD model convention suggests a draft
provision at items 30-31.
32
Jones, supra note 11, at 36.
33

SPECIAL REPORTS
personal allowances, relief, or tax reductions it
grants to its own residents based on civil status or
family responsibilities.
Briefly, the provision uses the taxation of a
domestic company as the yardstick for taxing a PE
of a nonresident company.
34
Unlike the forms
examined above, discrimination against a PE
considers residence, not nationality. The
provision is thus meant to ensure that taxation be
the same regardless of the residence of the
company carrying out a business activity. It is
intended to avoid tax discrimination based on the
actual place of an enterprise35
and affects all
residents of a state that carry out their business
activities in another state through a PE there. For
that reason, it is considered significant for the
development of industrial and commercial
activities between countries, to the point that
scholars consider it the most important form of
discrimination prohibited by article 24 of the
OECD model convention.
36
The term “enterprise” is to be interpreted
broadly. The word used in the draft clause was
“entrepreneur” (“operator” in the English
version), which seemed more appropriate
because it clearly covered both legal entities and
individuals engaged in a business activity. It was
replaced with the word “enterprise” in the 1963
OECD model convention.
37
Despite that, the
provision still seems applicable to individuals
who carry out business activities: The final
wording refers to personal allowances and relief
according to civil status or family situation.
Unlike the provision addressing
discrimination based on nationality, which
prohibits “any taxation or any requirement
connected therewith which is other or more
burdensome” than that experienced by nationals
of the other state, article 24(3) states that a PE of a
nonresident enterprise cannot be taxed less
favorably than a PE of a resident enterprise
carrying out the same business activities.
The different wording in the paragraphs of
article 24(3) and article 24(1) and 24(2) is
supposedly intentional.
38
It lets countries use
different methods to tax residents and
nonresidents engaged in similar activities as long
as they do not result in a PE of a nonresident
enterprise being taxed more severely than a
domestic company.39
Moreover, article 24(3) does
not prevent countries from establishing different
ancillary obligations, because the article does not
extend the prohibition to “connected
requirements.”
Model article 24(3) should be interpreted in
conjunction with model article 7(2), which
provides that a PE should be taxed as if it were an
independent enterprise carrying out the same
activities as a domestic one. However, to avoid
profit shifting from a PE to its head office, article
7(2) says a PE’s profits must be taxed in
accordance with the PE’s functions, assets, and
risks. Article 24(3) does not prohibit that
differentiated method for taxing a PE.
Further, the meaning of less favorable taxation
in article 24(3) is broad. A PE of a nonresident
enterprise cannot be subject to taxes other than
those residents are subject to, but they should also
receive the same tax treatment as residents for
expense deductions, depreciation rates, reserves,
and the loss carryforwards and carrybacks.
40
Moreover, those PEs should be entitled to the
same tax advantages granted to residents if they
meet the conditions of domestic legislation.
41
Finally, model article 24(3) states that it should
not be interpreted as requiring a country to grant
residents of the other country any personal
allowances, relief, or tax reductions based on civil
status or family responsibilities that it grants to its
own residents. That is to prevent a nonresident
(for example, an individual) that has a PE in
another state from obtaining more advantages
than those obtained by a state’s own residents.
Thus, it does not allow nonresidents to deduct
34
Holmes, supra note 19, at 405.
35
See commentary on OECD model article 24, supra note 20, at item
33.
36
Jones, supra note 11, at 36; and Lang, supra note 14, at 144.
37
38
Id. at 40.
39
See commentary on OECD model article 24, supra note 20, at items
35-37.
40
Holmes, supra note 19, at 405.
41
See Alberto Xavier, Direito Tributário Internacional do Brasil 215
(2010); and commentary on OECD model article 24, supra note 20, at
items 44-45.

SPECIAL REPORTS
expenses — for instance, for dependent children
— in both the country of residence and source. Yet
the country where the PE is situated may choose
to allow the PE to benefit from the personal
allowances, relief, and tax reductions it grants its
residents.
42
4. Debtor Based on the Creditor’s Residence
OECD model article 24(4) prohibits
discrimination based on the creditor’s residence,
stating that payments a debtor makes to a
nonresident creditor should be given the same tax
treatment, in terms of deductibility, as payments a
debtor makes to a resident creditor.
That prohibition was not in the 1963 OECD
model convention but was included in 1977.
43
It
resulted from a 1969 report on amendments that
could be made to article 24,44
and the wording of
article 24(4) in the 1977 OECD model (which
remains unchanged) is almost identical to that in
the report, which seems to indicate there was not
much opposition to its inclusion.
In general, model article 24(4) states that
interests, royalties, and other payments an
enterprise in one state makes to a resident of the
other state are deductible for determining that
enterprise’s profits as if they had been paid to a
resident of the first state. It also grants the same
treatment to debts incurred by the company in
determining the tax on its capital. Thus, if
payments made to a resident are deductible for
income tax purposes, payments made to a
nonresident must be as well.
Model articles 9(1) (transfer pricing
adjustments), 11(6) (excessive interest), and 12(4)
(excessive royalties) prevail over model article
24(4).
45
Thus, if the relationship between the
debtor and creditor causes the amount the debtor
owes to exceed the amount that would be payable
were the parties unrelated, the excess might be
considered nondeductible. Treating the excess of
interest or other expenses as nondeductible in that
situation does not violate model article 24(4),
although identical treatment does not apply to
payments made to residents.
Finally, model article 24(4) does not preclude
tax authorities from requesting additional
information on taxpayers that make payments to
nonresidents. It also does not prevent countries
from applying domestic thin capitalization rules,
even if those rules apply only to payments made
to nonresident creditors.
46
However, to avoid
litigation, states should reserve the right to apply
their domestic thin cap rules in the provision itself
or in a protocol concluded between state parties.
5. Ownership or Control
Model article 24(5) prohibits discrimination
based on the ownership or control of an enterprise
to prevent differential tax treatment of residents
based solely on the residence of their partners or
shareholders. In other words, it precludes a
resident company from having more onerous
taxation if one or more of its partners or
shareholders is not resident in the same country
as the controlled company.
47
That prohibition was included in the original
1963 OECD model convention, and there have
been no important changes in its wording.
48
According to article 24(5), an enterprise in one
state whose capital is owned or controlled (even
partially or indirectly) by a resident of another
state cannot be subject to any taxation or related
requirement that is different or more burdensome
than what a similar enterprise in the first state
would be subject to. It ensures that a company
controlled by a nonresident is subject to taxation
not less favorable than that of a company
controlled by a resident.
At first glance, it would seem that article 24(5)
prohibits a different form of taxation (for
example, a withholding tax on dividends paid to
a nonresident partner or shareholder if the same
treatment does not apply to dividends paid to
resident partners or shareholders). However, a
closer look at the article avoids misinterpretation.
Model article 24(5) applies only to taxation of
the resident company itself, not to taxation of its
nonresident partners or shareholders.
49
Also, even
42
43
44
Lang, supra note 16, at 222-223.
45
46
74-75.
47
Jones, supra note 11, at 46; and Lang, supra note 14, at 145.
48
Id. at 231-232; and Jones, supra note 11, at 40.
49

SPECIAL REPORTS
though the controlled company withholds tax on
payment of dividends, the tax is paid on behalf of
its shareholder (the payer acting solely as a
withholding agent). The OECD commentary
makes clear that the provision does not ensure the
same tax treatment for resident and nonresident
shareholders
50
; model article 24(5) does not
prohibit withholding tax on dividends paid to
nonresident shareholders even when there is no
withholding on payments to residents.
III. Why Volvo Should Be Overturned
As mentioned, one of the main questions in
Volvo was whether a 15 percent withholding tax
on dividends paid by a Brazilian resident
company to its shareholder in Sweden breached
Brazilian law and the principle of equal treatment
in Brazil’s constitution. Dividends paid to a
resident shareholder were exempt under articles
75 and 77 of Law No. 8.383/91.
Academics and the superior court ministers
have three main arguments to support the idea
that the withholding tax is not in line with article
24 of the Brazil-Sweden tax treaty:
• article 24(1) prohibits discrimination against
nonresidents;
• the treaty contains old wording that equates
foreigners to nonresidents; and
• article 24(4) prohibits different tax treatment
based on shareholder residence.
Those arguments are misconceptions.
A. The First Argument
Article 24(1) of the Brazil-Sweden tax treaty
prevents discrimination based on nationality —
that is, it prohibits different tax treatment between
nationals and foreigners in similar situations.
However, it does not prevent domestic legislation
from granting different tax treatment to residents
and nonresidents who are not “in the same
situation” for tax purposes.51
Residence is a criterion used by most
countries to determine whether a person is subject
to a territorial or a worldwide tax system.
Residents are usually taxed on their worldwide
income using a synthetic tax base (which allows
the taxpayer, for instance, to deduct expenses and
depreciation).52
Nonresidents are commonly
taxed on their gross revenue via a withholding tax
that applies exclusively to specific items of
income.
The distinction in tax treatment between
resident and nonresident taxpayers seems to be
justified. From a fairness perspective,
nonresidents are expected to use fewer
government services than their resident
counterparts.
53
From a tax administration
standpoint, a withholding tax can be the only
alternative for the source country to tax a
nonresident on income derived from some
transactions, given the limitations in enforcing
domestic laws abroad.
If Brazilian law disallowed different tax
treatment for resident and nonresident taxpayers,
a withholding tax applied to payments made to
nonresidents would also have to apply to
payments made to residents. Moreover, there
could be no differentiated withholding tax rates
for payments to residents in tax havens and low-
tax jurisdictions, which Brazil subjects to a 25
percent withholding tax instead of the 15 percent
rate applicable to other nonresident taxpayers.
Even absent the expression “in particular with
respect to residence” in article 24(1) of the Brazil-
Sweden tax treaty (included in the OECD model
convention in 1992), the provision is to be
construed in the sense that the taxpayer’s
residence should be considered relevant in
determining whether two taxpayers are in similar
conditions. The OECD commentary reinforces
that understanding, stating that OECD countries
have consistently held that residence plays an
important role in interpreting the expression “in
the same circumstances.”
54
B. The Second Argument
The second argument is based on article
24(2)(b) of the Brazil-Sweden tax treaty defining
50
76-78.
51
Xavier, supra note 41, at 214; and Philip Baker, Double Taxation
Convention: A Manual on the OECD Model Tax Convention on Income and on
Capital 24-2/3 (2012).
52
See van Raad, supra note 13, at 45.
53
Mason and Knoll, supra note 8, at 1014.
54
Commentary on OECD model article 24, supra note 20, at item 7.

SPECIAL REPORTS
the word “national” as including “all legal
persons, partnerships and associations
incorporated under the laws in force in a
Contracting State.” The wording of the paragraph
allegedly results in assimilating residence to
nationality in avoiding discrimination.
55
Under that reasoning, if companies
incorporated under Swedish law are considered
Swedish nationals under the treaty, article 24(2)(b)
would prohibit the 15 percent withholding tax on
dividends paid by a Brazilian national to a
Swedish national. Thus, the same tax treatment
would have to be given to both Brazilian and
Swedish nationals.
Considering that the Brazil-Sweden tax treaty
dates back to 1975, it appears to have followed the
wording of the 1963 OECD model (except for the
provision on nondiscrimination of stateless
persons — intentionally excluded from most of
Brazil’s tax treaties — and the provision
prohibiting discrimination based on the creditor’s
residence, which was not included in the OECD
model until 1977, as mentioned).
The basis for giving a company incorporated
under Swedish law the same tax treatment as a
company incorporated in Brazil is the expression
“incorporated under the laws in force in a
Contracting State,” used to qualify a legal person
as a national of a contracting state. That
expression differs from the one used in the
English version: “deriving their status as such
from the law in force in a Contracting State.” In
case of conflict, the English version prevails.56
At first glance, that distinction in wording
may seem immaterial and irrelevant. However,
the fact that the wording used in the English
version of article 24(2) of the Brazil-Sweden tax
treaty is the same as that of article 24(2) of the 1963
OECD model convention might come into play.
Comments on the 1963 OECD model, as well as
subsequent updates to the model, could help
determine the scope and meaning of the provision
— even if Brazil is not part of the OECD.57
Analyzing OECD model article 24(2), one
academic has clarified that if domestic laws
distinguish between corporate nationality and
corporate residence, the OECD model convention
has chosen place of incorporation to determine
corporate nationality for nondiscrimination
purposes. Reference to the laws of the state where
the legal person “derives its legal status” is meant
to reflect that only the law of the state of
incorporation is to determine whether an entity
qualifies as a legal person.58
Accordingly, it seems that the purpose of
using the phrase “deriving their status as such
from the law in force in a Contracting State” to
define nationals in the English version of the
Brazil-Sweden tax treaty was not to equate
foreigners to nonresidents for nondiscrimination
purposes. Rather, the expression seems to have
been designed as a tiebreaker if there is a domestic
distinction between corporate residence and
corporate nationality.
However, even assuming that article 24(2)(b)
of the Brazil-Sweden tax treaty extends to
nonresidents the prohibition on discriminating
against nationals, a Swedish nonresident national
is not in the same circumstances as a Brazilian
resident national. Again, residence plays an
important role in interpreting the expression “in
the same circumstances”; the article does not
prevent different tax treatment for dividends paid
to residents and nonresidents.
Compelling evidence for that is found in the
OECDcommentary,whichmakesclearthatunder
the laws of many countries, incorporation or
registration is an important criterion in
determining both the nationality and residence of
a company. Thus, it would be important to
distinguish different tax treatment based solely
on nationality from differential treatment based
on other circumstances, such as residence.
59
55
Luis Eduardo Schoueri, “Prefácio,” in Tributação Internacional:
Análise de Casos 13-23 (2010).
56
According to article 29 of the Brazil-Sweden tax treaty, the
convention was duplicated in Portuguese, Swedish, and English, all
three being equally authentic.
57
For an analysis of the role of the OECD commentary in tax treaty
interpretation, see Lang and Florian Brugger, “The Role of the OECD
Commentary in Tax Treaty Interpretation,” 23 Australian Tax Forum 95
(2008). See also Klaus Vogel, “Double Tax Treaties and Their
Interpretation,” 4 Int’l Tax & Bus. Law 1-85 (1986).
58
Van Raad, Nondiscrimination in International Tax Law 82-83 (1986).
59
Commentary on OECD model article 24, supra note 20, at item 17.

SPECIAL REPORTS
In the Volvo case, the different tax treatment
for dividends paid by a Brazilian resident
company to its Swedish shareholders is not
because the shareholder is a Swedish national, but
because it is a nonresident taxpayer. If the
Swedish shareholder were an individual resident
in Brazil, its dividends would be exempt.
Interpreting article 24(2)(b) of the Brazil-
Sweden tax treaty to extend the prohibition to
discriminate against nationals to nonresidents
would also be inappropriate because that would
result in all tax treaties that follow the wording of
the 1963 or 1977 OECD model to extend that
treatment to nonresidents. That interpretation
was not intended by the OECD, nor was it
suggested in the studies by the OEEC Fiscal
Committee.
Moreover, even though article 24(2)(b) was
removed from model article 24, it was not deleted
altogether — it is now article 3(1)(g). Accordingly,
it would still apply to all states that follow later
versions of the OECD model without reserving on
that article.
Thus, the old wording of article 24(2)(b) of the
Brazil-Sweden tax treaty did not imply that
residence and nationality are the same for
nondiscrimination purposes. Further, that
wording should not have any effect on the
provision’s interpretation, considering not only
the explanations in the OECD commentary, but,
more importantly, that resident and nonresident
taxpayers are not in the same circumstances.
C. The Third Argument
The third argument considers that dividends
paidtoVolvo’sparentcompanyinSwedenshould
receive the same tax treatment as dividends paid
to a domestic shareholder in Brazil.
That reasoning does not work because it is
based on the false assumption that article 24(4)
ensures similar tax treatment for resident and
nonresident shareholders of a resident enterprise.
Actually, that article prohibits unfavorable tax
treatment of the resident enterprise itself, not of
foreigner shareholders.
60
The OECD commentary confirms that
understanding, saying the provision concerns the
taxation of the enterprise itself and not of the
persons owning or controlling its capital and is
meant to ensure that resident companies are
treated equally, regardless of who owns or
controls their capital.61
Thus, article 24(4) of the Brazil-Sweden tax
treaty prevents a Brazilian resident company
from being taxed less favorably just because it has
a foreign shareholder. However, in retrospect,
there was no increment in the taxation of the
Brazilian resident company attributable to its
shareholder being a Sweden-based company.
Although the Brazilian subsidiary must
withhold tax on payment of dividends to its
parent company in Sweden, the tax is paid on
behalf of its shareholder (the payer acting solely
as a withholding agent). The Brazilian resident
company remains taxed as if its partners were
resident in Brazil.
Faced with whether imposing a withholding
tax on dividends paid to a nonresident company
but not to a resident one would discriminate
based on ownership or control, the OECD
commentary goes in the same direction. It says
different treatment would not depend on foreign
control or ownership, but rather on the fact that
nonresidents are subject to different tax
treatment.
62
Once again, residence is pivotal, being a
reasonable criterion to distinguish taxpayers for
tax purposes. Nonresident taxpayers can (and
should) be treated differently because they are not
in situations equivalent to those of resident
taxpayers. All arguments used to support a
different view seem incorrect.
That is why the Supreme Court must resume
discussion of the case as soon as possible and
reverse the superior court’s decision. The only
vote so far seems to go in the right direction,
correctly distinguishing nationality from
residence for tax purposes. Hopefully the other
justices follow suit.
60
Van Raad, supra note 58, at 186.
61
Commentary on OECD model article 24, supra note 20, at item 76-
78.
62
Id. at item 78.

SPECIAL REPORTS
IV. Conclusion
Tax discrimination is important in most legal
systems. One of the major concerns is whether the
criteria used to give differential treatment to
taxpayers is reasonable. Any unequal treatment
should have a justification, and most countries
prevent any unjustified discrimination in both
their international tax treaties, which normally
follow article 24 of the OECD model convention,
and their domestic legislation.
In Volvo, a closely divided Superior Court of
Justice seems to have focused on the supremacy of
tax treaties over domestic legislation rather than
on the interpretation of article 24 of the Brazil-
Sweden tax treaty. It held that exempting
dividends paid to resident shareholders while
withholding tax on dividends paid to nonresident
shareholders would constitute unjustified
discrimination.
This article has attempted to unravel the
misconceptions regarding nondiscrimination,
relying on one central argument: Nonresident
taxpayers are not in the same situation as resident
taxpayers. Thus, a nonresident taxpayer is not
entitled to the same tax treatment as a resident
one, whether under the Brazil-Sweden tax treaty
or the Brazilian Constitution.
Volvo will have no direct long-term effects
because Brazil has exempted dividends since
1995, regardless of the recipient’s residence.
However, the case could have an indirect effect by
being important precedent for the tax
administration to assert that subjecting resident
and nonresident taxpayers to different taxation
does not breach the constitution or the
nondiscrimination principle in article 24 of
Brazil’s tax treaties. To hold otherwise could
jeopardize the structure of nonresident taxation in
Brazil.
It would be a shame if the Brazilian Supreme
Court were to sidestep the question whether
different tax treatment for dividends paid
according to the shareholder’s residence is in line
with article 24 of the Brazil-Sweden tax treaty by
claiming it is not within its powers to interpret
infraconstitutional legislation. Even so, it cannot
(and should not) avoid answering whether
different tax treatment to residents and
nonresidents is justified under the equality
principle.
It seems unwise to further suspend a decision
involving a topic as fundamental as tax
discrimination. The Supreme Court has the power
to have the final word on constitutional matters, as
well as the responsibility to provide legal certainty
for taxpayers and administrators. Further delay
only contributes to uncertainty. 

Revisiting Volvo in Light of the Nondiscrimination Provision in article 24 of the Brazil-Sweden Tax Treaty

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