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H Philip Schneider

Schneider Pugliese, Sao Paulo

philip.schneider@schneiderpugliese.com.br

 

Clara Gomes Moreira

Schneider Pugliese, Sao Paulo

clara.moreira@schneiderpugliese.com.br

 

Since 1993, Act no 8383/1991 has established that the distribution of dividends is exempt from income tax, as long as the partner/shareholder (individual or legal entity) is resident in Brazil (Article 75). In the case of non-resident partners/shareholders, there is a withholding tax on dividends of 15 per cent (Article 77).

In regard to these rules, a Brazilian company initiated a legal action before the Brazilian courts arguing the violation of the non-discrimination clause (Article 24) of the Tax Convention on Income and on Capital (Double Tax Convention (DTC)) Brazil-Sweden. This occurred because the Brazilian company was distributing dividends to a partner resident in Sweden, therefore withholding tax based on Articles 10(2) of the aforementioned DTC and 77 of Act no 8383/1991.

On 22 July 2004, regarding the special appeal no 426945/PR on the subject, the Superior Court of Justice decided that the different treatment that arose from Articles 75 and 77 of Act no 8383/1991 was illegal, as it violated the non-discrimination clause (Article 24) of the DTC Brazil-Sweden.

Some elements of the Reporting Justice’s opinion should be stressed:

• the ‘principle’ of avoidance of double taxation, consentaneous with the international order – it exceeds the scope of the Brazilian Constitution – should be protected;
• the non-discrimination clause should be interpreted in consonance with this principle, as well as with the constitutional principle of free trade and prevention of discrimination against foreign investments;
• although based on the residence criterion, Article 77 of Act no 8383/1991 treated equivalent situations differently – objective compared (resident persons and non-resident persons) – violating the non-discrimination clause. One should emphasise, however, that this clause is guided by the nationality criterion, and not by the residence one. This criticism will be explained more thoroughly later.

In reaching this conclusion, the Reporting Justice affirmed, in an obiter dictum, that Article 98 of the Brazilian Tax Code – which prescribes that tax treaties prevail over domestic infra-constitutional rules – must be interpreted in conformity with the Brazilian Constitution. As a consequence, the domestic law (infra-constitutional rules) could revoke or modify tax treaties, independently of the occurrence of treaty override. As an obiter dictum, however, this topic remains open, in the sense that later decisions may examine once again the interpretation (and constitutionality) of Article 98 of the Brazilian Tax Code.

Against this decision, the Supreme Federal Court analysed, on 4 August 2020, the extraordinary appeal no 460320/PR. The majority opinion was that this appeal does not fulfil its requirements, because it refers to an infra-constitutional controversy, and not to a constitutional one.

Until this decision, there was controversy about whether DTCs prescribe human rights and if they could have constitutional status – in case other requirements are also met. Since 2004, Constitutional Amendment no 45 has attributed the constitutional status to international treaties and conventions on human rights, as long as they are approved by the National Congress in two rounds of voting, by three-fifths of the votes of the respective members. One could infer from this decision that DTCs do not have constitutional status and, therefore, their rules may be declared incompatible with the Brazilian Constitution (unconstitutional). This discussion is especially relevant in the case of the principal purpose test, with attention to the constitutional principle of legal certainty (‘is the former compatible with the latter?’) – a topic still undefined in our legal system.

Whether this decision of the Supreme Federal Court is definitive – there is still time for a motion for clarification – the final judicial decision on the merits is one for the Superior Court of Justice. This decision is subject to criticism, as mentioned above, since it considers nationality and residence equivalent criteria for the application of the non-discrimination clause.

In conclusion, one must consider that Article 24 disciplines the equivalence of tax treatment of two non-resident persons while having different nationalities. The Brazil-Sweden DTC is from 1976 and its Article 24 has a different text in comparison to more recent DTCs – the former defines a national legal entity as the one formed under the law of one of the contracting states. Despite this difference, the reason behind the non-discrimination clause remains the same: it compares non-resident persons. Thus, the understanding of the Reporting Justice is not compatible with the non-discrimination clause, but, still, it may guide other cases brought before Brazilian courts deserving our attention.

So, the normative status of treaties remains uncertain (in case of conflict with infra-constitutional rules), despite being clear on its infra-constitutional status. In addition, the non-discrimination clause is being analysed by Brazilian courts comparing resident persons and non-resident ones, despite its literal interpretation in a diverse sense.

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