Castellán

The DTAA aims to eliminate double taxation on income and wealth taxes using the method of tax credit, that is, allowing the refund in the taxpayer's country of residence (under certain conditions) of the taxes paid in the other country.

 

Who can benefit from this DTAA?

 

As mentioned in the treaty's article 1, this DTAA can be used by residents of one or both countries.

 

By residents, we understand both legal persons (commercial companies) and individuals who meet the following condition: “any person who, under the legislation of that State, is liable to taxation therein by reason of domicile, residence, place of incorporation, place of management or any other criterion of a similar nature, including also that State and its political subdivisions or local authorities”.

 

It is important to mention that in the case of an individual having dual residency, the same treaty provides rules for determining which is the country of residence and how to correctly use the DTAA.

 

Regarding legal persons, the competent authorities of both countries will agree taking into account “their place of effective management, the place of their incorporation or creation, and any other relevant factor.”

 

What taxes are covered in this DTAA?

 

The taxing powers are established for income and wealth taxes existing in each country, and it is added that it will also apply to similar taxes to be created after the entry into force of the aforementioned Agreement.

 

In the case of Uruguay, the DTAA applies to the following taxes:

 

- Tax on Economic Activities Income (IRAE)

- Personal Income Tax (IRPF)

- Non-Resident Income Tax (IRNR)

- Social Security Assistance Tax (IASS)

- Wealth Tax (IP)

 

In the case of Brazil:

 

- Federal Income Tax (Imposto Federal sobre a Renda)

- Social Contribution on Net Profit (Contribuição Social sobre o Lucro Líquido)

Consumption taxes such as VAT and special contributions to social security (Social Security Laws - BPS) are excluded.

 

Income tax provisions

 

The DTAA divides the different types of income and the treatments applicable to each case.

 

Next, we will mention those that we understand are of greatest interest to taxpayers.

 

A. Business Income

 

Business income is understood as any business activity obtained by a company, as long as that income is not covered in another article of the DTAA such as interest, real estate income, dividends, etc. They will be fully taxed in the country of residence of the subject generating them, unless there is a Permanent Establishment (PE) in the other State, in which case only the income attributable to that PE can be taxed.

 

A Permanent Establishment is considered to exist when a company carries out activities in a fixed place such as: Management headquarters, branches, offices, factories, and workshops. These are carried out for a continuous period of 6 months. In turn, a work, or a construction or installation or assembly project as long as it is also for a period of 6 months. They also include the provision of services by a company through its employees or other personnel hired by the company for that purpose, supervision activities related as long as they exceed 183 days in a period of 12 months.

 

B. Dividends

 

Dividends paid may be subject to taxation where the beneficiary of that income resides. It may also be subject to taxation in the State where the distributing company resides, but it cannot exceed the following limits:

 

- Cap of 10% of the gross amount of dividends, if the beneficiary held at least 25% of the capital in the 12 months prior to the payment.

- Cap of 15%: in other cases

 

C. Interests

 

Interests paid may be subject to taxation where the beneficiary of that income resides. It may also be subject to taxation in the State where the company paying those interests resides, as long as it does not exceed 15% of the gross amount of the same.

 

D. Royalties

 

In the case of royalties, the taxing power is shared between both countries. However, the tax in the country paying the royalties cannot exceed the following limits:

 

- 15% of the gross amount of royalties from the use or granting of use of trademarks.

- 10% of the gross amount of royalties in other cases.

 

E. Fees for Technical Services

 

They are defined as any payment made for managerial, technical, or consulting services. Although the country of residence of the recipient of the payment has the power, the country that pays for these services can tax up to 10% if the ultimate beneficiary is a resident of the country of residence.

 

The agreement also establishes the taxing power for other incomes such as capital gains, independent personal services, dependent work incomes, maritime and air navigation, among others.

 

Wealth Tax Provisions

 

The provisions applied to wealth do not take effect until diplomatic notes are exchanged between both countries. The protocol clarifies that such exchange will not take place until Brazil introduces a wealth tax.

 

How is this method to avoid double taxation implemented?

 

Double taxation is eliminated by applying the tax credit method. When tax residents of a country (Uruguay or Brazil) earn income that has been taxed in the other country, they can credit the withholding against any tax (Uruguayan or Brazilian, as the case may be) to be paid in relation to the same income.

 

At this point, we must highlight two important things:

 

i. In order to use this credit in Brazil, the provider in Uruguay must request a tax residence certificate from the Tax Administration (DGI).

 

ii. The deduction of the tax credit cannot exceed the amount that the taxpayer must attribute for the income or wealth tax of the State of residence that applies the deduction, that is, the credit can be used up to the limit of the tax paid in the source country.

 

Limitation of Benefits

 

The treaty includes an anti-abuse clause that seeks to avoid instances of Treaty Shopping and thus limit the use of aggressive tax planning. In these cases, the treaty benefits cannot be used.

 

Conclusion

 

With the entry into force of this DTAA, progress is made in developing economic bilateral relations between Uruguay and Brazil and strengthening their cooperation in tax matters in a regulated fiscal framework. This allows Uruguay to have treaties to avoid double taxation with its major trading partners in MERCOSUR and the region: Argentina and Brazil.

 

Montevideo, February 28, 2024.