The Brazilian-Israeli Double Tax Treaty enters into force

Having the Congress approved its text and the President ratified and enacted the Brazilian-Israeli Double Tax Treaty (the “DTT”), the same entered into force in Brazil at the end of 2005.

One of the DTT’s most important provisions-article 12 - limits withholding tax on royalties. Pursuant to such article, to the extent that the effective beneficiary is located in either Brazil or Israel, the country of source may impose withholding tax on royalties (deemed also to cover fees payable for technical assistance and technical services fees) at the following maximum rates: (i) 15%, when royalties relate to the use of industrial or commercial trademarks; and (ii) 10%, for any other kind of royalty.

The reduction of the withholding tax rate from 15% (which is the rate usually levied in Brazil, on royalties, regardless of the underlying reason fro such services) to 10% (except for royalties payable by virtue of the use of industrial or commercial trademarks), introduced by the DTT, is very beneficial.

Moreover, taking into account that Brazilian tax legislation levies a 15% withholding tax on technical assistance and technical services fees, it is arguable that article 12 of the DTT limits such withholding tax to a rate of 10%, given that the concept of royalties includes technical assistance and technical services fees.

In light of the above benefits, the DTT may be seen as a device to promote cross-border transactions between Brazil and Israel, since it reduces the tax burden on certain royalties, technical assistance and technical services fees. Notwithstanding, it should be noted that cross-border services agreements are still heavily taxed in Brazil and other taxes should be taken into account in the identification of the tax treatment applicable to payments to non-residents (i.e., Service Tax-ISS, CIDE, and PIS/COFINS), especially when residents in Brazil and in Israel are related parties.

Additional information on the above may be obtained directly from Antonio Amendola at antonioamendola@felsberg.com.br.