The Dutch government announced on 21 February 2023 that, in order to maintain its vast network of tax treaties executed with other jurisdictions, the Kingdom of the Netherlands will renegotiate in 2023 several existing tax treaties and conclude new ones.

Because recent changes in tax law related to the BEPS project may lead to more disputes regarding the application of tax treaties and, potentially, to double taxation, the Dutch government aims to include a mutual agreement procedure in its new tax treaties and to improve the existing ones based on the recommendations of BEPS Action 14. 

Similarly, the Dutch government also aims to include a minimum standard provision in its tax treaties dealing with treaty shopping to ensure a minimum level of protection against treaty abuse. The minimum standard, which follows BEPS Action 6, would give jurisdictions the possibility to deny the application of treaty benefits if tax saving is one of the taxpayer’s main purposes for performing the arrangement.

With this context in mind and considering that Brazil has not signed the BEPS Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), the Dutch government expressly mentioned that Brazil is one of the countries with which the Netherlands intends to resume the existing renegotiation procedure.

Minimum standard - Principal Purposes Test (“PPT”)

The Dutch government aims to include the Principal Purposes Test (“PPT”) in the tax treaty with Brazil in order to be in line with the minimum standard. Such a test aims to deny the application of the treaty benefit if it is concluded that a certain transaction has been performed with the main purpose of obtaining a tax treaty benefit. In other words, the PPT focuses on tackling treaty abuse without impacting arrangements with real economic substance. 

We expect the Dutch government to push for the inclusion of the PPT article during the renegotiations of the existing tax treaty with Brazil. Even though Brazil is not an MLI signatory, the country has adopted the MLI wording in (i) the treaties signed in the last years with Singapore and Switzerland; (ii) the amendment of protocol of the existing treaty with Argentina and; (iii) the tax treaty signed between Brazil and United Kingdom of Great Britain and Northern Ireland (“UK”), which is still pending for ratification by the Brazilian National Congress and the enforcement by the Brazilian president.

Besides the MLI, we highlight below examples of articles which the Dutch and Brazilian government may seek to renegotiate or include in the tax treaty:

Dividends:

In Brazil no withholding tax (WHT) is levied on dividends. However, there are constant debates regarding a potential tax reform that would increase WHT on dividends, potentially to 15%. 

As per the current wording of the tax treaty in force between Brazil and the Netherlands, the WHT on dividends would be limited 15% (e.g., same as the potential internal rate if the tax reform is approved). 

In this context, it may be possible that the Dutch government intends to include a clause exempting or reducing a WHT on dividends payments.

On the other hand, it is important to note that no treaty signed by Brazil provides a full WHT exemption on dividend payments (e.g., the lowest WHT rate on dividends concluded in a tax treaty is 10%).

Interest on net equity: 

In 2022 both countries agreed under the competent authority agreement that the Brazilian interest on net equity shall be regarded as interest under the tax treaty. Thus, since this agreement was recently concluded between the Netherlands and Brazil, we expect that the renegotiated tax treaty between the Netherlands and Brazil will include a similar wording regarding the treatment of Brazilian interest on net equity.  

Technical services:

Similarly to the tax treaties signed with Argentina, Singapore, Switzerland and UK, Brazil might include a technical services clause that would allow the source country to apply WHT on technical services. 

If case this clause is indeed included, the Dutch government may consider a wording similar to the treaty signed between Brazil and UK, which provides regressive rates of WHT: (i) 8% for the first two years, (ii) 4% for the third and fourth years and (iii) 0% for the others. 

Currently technical services are not taxed with a Dutch withholding tax and the Dutch government’s view on withholding taxes such as a withholding tax on royalties is that in principle the residence jurisdiction should have the exclusive taxing rights over royalties and that the source country should not be able to levy a withholding tax. We therefore expect that the Dutch government aim to include a similar approach under the new tax treaty. 

Associated Enterprises:

Another article that can be discussed is the one related to Associated Enterprises so that it is in line with OECD Transfer Pricing Guidelines, which establishes corresponding transfer pricing adjustments via Mutual Agreement Procedures (“MAP”).

Given the fact that such wording was included in the latest tax treaty signed between Brazil and UK, a similar amendment may be included in the renegotiation proceeding with the Netherlands.

Matching credit

Current tax treaty between Brazil and the Netherlands contains a matching credit clause, whereby the state of residence must grant a credit higher than the tax paid in the source state.

Considering this is not aligned with OECD guidelines and that none of the recent treaties signed by Brazil contain a similar clause, it seems to us that such an article might be excluded from the renegotiation proceedings.

For more information, please contact A&M or reach out to Rodrigo Kurayama, Marc Sanders or Emerson Santana.