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December 8, 2022

Brazil and United Kingdom sign comprehensive double tax treaty

  • Brazil and the United Kingdom (UK) have signed their first comprehensive Double Tax Treaty (the Treaty). The Treaty is not yet in force but will come into force once both countries have notified each other that their domestic legislative procedures have been completed.
  • The Treaty is Brazil's fifth with a G7 country (excluding Germany and the United States) representing renewed energy in Brazil's treaty policy. The Treaty extends the UK network of treaties which is already the world's largest reflecting the breadth and diversity of UK trading relationships.
  • The Treaty incorporates post base erosion and profit shifting (BEPS) minimum standards and key items from existing Organisation for Economic Co-operation (OECD) and United Nations (UN) model treaties. Incorporation of the arm's-length standard represents a "first" for Brazil, but it is notable that the Mutual Agreement Procedure article requires "endeavours" only without recourse to arbitration.
  • The Treaty combines a principal purpose test with a comprehensive limitation on benefits article. Listed companies and companies with a substantial active trade or business in both countries will be key beneficiaries of the new Treaty.

Executive summary

On 29 November 2022, the governments of Brazil and the UK signed a Double Tax Treaty (DTT) that includes rules aimed at avoiding double taxation on transactions and investments between both jurisdictions, as well as the prevention of tax evasion and avoidance. The DTT must complete the internal ratification process in both countries, and the appropriate diplomatic notifications must be given by both countries before it can enter into force.

Up until its ratification, the current tax treatment continues to apply for both countries and, therefore, UK withholding tax is generally applicable at 20% on interest and royalties, and Brazilian withholding tax is generally applicable at 15% on interest, royalties, and services (neither country currently imposes dividend withholding tax).

Detailed discussion


The DTT's preamble states that the governments of both Contracting States desire to further develop their economic relationship and to enhance their cooperation in tax matters. The DTT adopts the language recommended under Action 6 of the BEPS project describing the intent of the Contracting Jurisdictions to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.

Persons covered

The DTT contains a provision which addresses both income and gains derived by or through fiscally transparent entities.

Taxes covered

The existing taxes to which the new treaty shall apply are:

  • In the case of Brazil: (i) Federal income tax; and (ii) Social contribution on net profit
  • In the case of the United Kingdom: (i) Income tax; (ii) Corporation tax; and (iii) Capital gains tax


The DTT has the post-BEPS standard, a tie-breaker clause for corporate tax residence based on mutual agreement between the Competent Authorities, having regard to "its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors."

Permanent establishment (PE)

The PE article appears to be largely in line with the OECD model treaty. It also includes the anti-fragmentation provisions from the OECD multilateral instrument (MLI).

Under the DTT, a construction PE would be deemed to exist if the construction projects or activities last more than 183 days (rather than the 12 months in the OECD model), whereas a service PE will be triggered if the activities continue for more than 183 days in a 12-month period.

Additionally, regarding preparatory or auxiliary activities, the DTT includes an anti-fragmentation clause under which the overall activity resulting from the combination of separate activities (which separately are deemed as auxiliary or preparatory) will not have an auxiliary or preparatory character if such activities constitute complementary functions that are part of a cohesive business operation.

The DTT's agency PE concept includes scenarios in which the agent habitually plays a leading role in the conclusion of contracts, without significant modifications by the foreign enterprise, which is in line with the Brazilian domestic rule.

The DTT provides that, subject to PE rules, if an insurance enterprise in one state insures risks located therein through a person other than an independent agent, the enterprise shall be deemed to have a PE in the source state. This provision does not cover the assignment of reinsurance premiums.

As a final remark, Brazilian domestic rules do not provide such a broad concept of PEs as they are focused mainly on agents, representatives and/or similar institutes carrying on business in Brazil, with powers to bind the foreign entity. Within this context, the agency PE concept provided by the DTT appears to be particularly relevant.

Business profits

The business profits article is substantively similar to the OECD model but there is no explicit provision regarding the elimination of double taxation. This is in line with the UN model, which also does not contain such an explicit provision. There is an explicit allowance of deductions.

Associated enterprise

This is the first Brazilian treaty to include a paragraph similar to article 9.2 of the OECD Model convention, allowing for a corresponding transfer pricing adjustment. Brazil's official position has historically been to refrain from adopting paragraph 2 of article 9, which has often been an obstacle in avoiding economic double taxation.

It should be noted that the DTT does not require a Contracting State to make a corresponding adjustment under this article after the expiry of any domestic time limits.

Main types of income

Under the DTT, the following withholding tax rate limits are applicable for passive income:

Type of income

Tax limit in the source country


Dividends (i)


  • The beneficial owner of the dividends is a pension scheme established in the other Contracting State


  • The beneficial owner holds at least 10% of the capital throughout a 365 period, including the day of the payment of the dividends.


  • The beneficial owner is a resident of the other Contracting State.
  • Dividends paid out of income (including gains) derived directly or indirectly from immovable property.



  • The beneficial owner is a pension scheme established in the other Contracting State, the other contracting State, a political subdivision, a local authority thereof or central bank of such State, or any institution or an agency (including a financial institution) wholly owned by that Contracting State or political subdivision or local authority thereof.


  • The beneficial owner is a bank or financial institution, and the loan has been granted for at least five years to finance infrastructure projects and public utilities.


  • Loans granted by banks and insurance companies in transactions involving persons that are not associated within the meaning of article 9.
  • Bonds or securities that are regularly and substantially traded on a recognized stock exchange.
  • Interested derived from a sale on credit paid by the purchaser of machinery and equipment to the seller of the machinery and equipment.


  • The beneficial owner is a resident of the other State.

Royalties (ii)


  • The beneficial owner is a resident of the other State.

Technical services, technical assistance, consulting, and management services (iii)


  • Beneficial owner resident of the other Contracting State during the first two years in which the fees for technical service are charged.


  • Beneficial owner resident of the other Contracting State during the third and fourth years in which the fees for technical service are charged.


  • Beneficial owner resident of the other Contracting State after the fourth year in which the fees for technical service are charged.
  • Distributions of profits from the PE/branch to its head office will be treated as dividends for purposes of the DTT, subject to a maximum withholding tax rate of 10%.
  • The definition of royalty under this article includes payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and recordings for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, any industrial, commercial, or scientific equipment, or for information (know-how) concerning industrial, commercial or scientific experience.
  • Where the person paying the royalties has a PE or fixed base in one of the Contracting States and that establishment or base bears the cost of the royalties, the royalties are deemed to arise in the state in which the establishment or base is situated.
  • The definition of technical services under this article includes payments made for any service of a managerial, technical or consultancy nature. However, it does not include payments: (i) to employees of the person making the payment; (ii) for teaching in or by an educational institution; or (iii) by an individual for services of personal use.

With respect to dividends, neither country currently has a dividend withholding tax, however several tax reform proposals are under discussion in Brazil, which could establish a withholding tax on dividends paid to individuals and nonresident shareholders at a 15% rate. However, in such case, the applicable rate should be reduced by the DTT.

Another noteworthy aspect on this DTT is that technical services/technical assistance and royalties are dealt with in separate articles. Historically, DTTs signed between Brazil and other jurisdictions treated technical services/technical assistance as analogous to royalties and applied, therefore, the same tax treatment. With the split into two separate provisions, more accuracy is expected on the application of the DTT. And considering that both articles provide for a rare rate reduction from 10% to 0% on the withholding tax, these provisions are especially relevant for the technology/software and service industries.

The protocol to the DTT provides that if Brazil agrees to lower withholding tax rates in a treaty with another State in relation to dividends, interest and royalties, the Contracting States will consult with each other as to whether to update the DTT. With regard to technical services, if Brazil agrees to lower withholding tax rates in a treaty with another OECD member state (other than one in Latin America), then the lower rates will automatically apply under this DTT.

Capital gains (sale of shares or participations)

The DTT grants exclusive taxing rights for the Contracting State of which the alienator is a resident with respect to gains derived from the alienation of ships or aircraft, or of movable property pertaining to the operation of such ships or aircraft. It also grants exclusive taxing rights to the Contracting State of which the alienator is a resident, where the gain arises from the alienation of property or rights (other than those covered above) but does not arise in the other Contracting State. In practice, it is expected that paragraph 2 of article 14 may lead to shared taxing rights in most situations. A particular issue may be that this means the treaty reserves a taxing jurisdiction to the source country on the sale of shares in a local company. Such share sales are not generally taxable under domestic UK tax law but are taxable in Brazil.

Income from employment and director's fees

Articles 16 and 17 deal with income from employment and directors' fees respectively. Article 16 provides for relief from double taxation for short term business visitors resident in either country and working in the other, subject to requirements which are consistent with the OECD model treaty.

Offshore activities

The DTT contains an offshore activities article. "Offshore activities" are activities that are carried on offshore in a state in connection with the exploration, exploitation or extraction of the seabed and subsoil and their natural resources in that state.

Elimination of double taxation

The DTT provides for the elimination of double taxation by way of a deduction from the tax in Brazil and a tax credit in the UK.

Mutual Agreement Procedure

Taxpayers will have three years to seek the competent authorities' assistance for the resolution of tax disputes arising as to the interpretation or application of the DTT. This article appears to be in line with the OECD model other than it stipulates that a case must be submitted to the competent authority of the Contracting State of which the taxpayer is resident. There is no arbitration provision.

Entitlement to benefits

The preamble of the DTT states that its purpose is to eliminate double taxation without creating opportunities for non-taxation, or for reduced taxation through tax avoidance or evasion (including an express reference to treaty shopping).

In addition, the DTT includes an anti-abuse clause that contains a limitation on benefits (LOB) rule, which must be complied with (in any of the scenarios provided by the LOB clause) for the benefits of the DTT to apply. In this regard, the protocol also contains a non-exhaustive list of factors that should be considered (along with the location of shareholders, activities, and assets) to determine whether a resident is engaged in the active conduct of a business in their state of residence.

However, even if the LOB rule is complied with, if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction, the benefits of the DTT will not be granted.

The DTT also contains a special rule for triangulations through a PE in a third jurisdiction (i.e., an enterprise of a Contracting State derives income from the Source State which attributes such item of income to a PE in a third jurisdiction). The income does not need to be exempt from tax in the first state for treaty benefits to be denied. Instead, the provision looks at whether the combined effective rate of tax in the first state and the jurisdiction in which the permanent establishment is situated is less than the general statutory rate of company tax applicable in the first state.

Brazilian controlled foreign corporation (CFC) rules and tax treaties (protocol to the DTT)

Similar to other recent treaties signed by Brazil, the Protocol to the DTT expressly mentions that the DTT will not be interpreted to mean that a Contracting State is prevented from using its domestic provisions to prevent tax avoidance or evasion such as the CFC rules and thin capitalization rules. While it is more of academic than practical interest given the tax rates in the two countries it is interesting that the minimum tax rules under GloBE are not explicitly mentioned here.

Entry into force

For the DTT to enter into force, each Contracting State must notify the other that the domestic law requirements and procedures for ratifying the DTT have been completed.

Once each Contracting State fulfills the notification requirements, the DTT will enter into force and its provisions will become effective as follows:

In Brazil

Nature of taxes


Taxes withheld at source

Amounts paid, remitted, or credited on or after the first day of January following the date upon which the DTT enters into force

Other taxes on income

In respect of income in tax years beginning on or after the first day of January following the date upon which the DTT enters into force

In the UK

Nature of taxes


Taxes withheld at source

Amounts paid or credited on or after the first day of the second month next following the date on which the DTT enters into force

Income tax and capital gains tax

For any year of assessment beginning on or after 6 April next following the date on which the DTT enters into force

Corporation tax

For any financial year beginning on or after 1 April next following the date on which the DTT enters into force

Approval process

For the DTT to enter into force, in the case of UK, a draft Order in Council must be laid before the House of Commons. Once approved by a resolution of the House of Commons, a Statutory Instrument is made to give effect to the DTT.

In the case of Brazil, it is required that the Congress (both Senate and Lower House) approves it as a law. Subsequently, the President must approve it, and then the treaty is published to become officially enforceable. Once the above procedures are completed, the countries will exchange corresponding diplomatic notes, reporting that they have completed the required internal procedures.


For additional information with respect to this Alert, please contact the following:

EY Assessoria Empresarial Ltda, São Paulo

Ernst & Young LLP (United Kingdom), London

Ernst & Young LLP (United States), Latin American Business Center, Brazil Desk, New York

Ernst & Young LLP (United States), UK Tax Desk, New York

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific