Alana Aiche do Carmo Dahrouj
Lawyer at Marcos Martins Advogados
In tax matters, international treaties and conventions have the power to revoke and modify domestic Brazilian legislation, and it is even obligatory to observe them for future legal provisions.
However, with the passage of time, the harmony between the content of an international treaty to which Brazil is a signatory and the provisions of domestic laws is not always maintained, and this is when the conflict of rules becomes evident.
The Superior Court of Justice ( STJ), when analyzing one of these conflicts, ruled that the international treaty prevailed over the domestic law, thus giving precedence to the convention between Brazil and France to avoid double taxation (Decree 70.606 of May 12, 1972).
The case in question concerned the provision of services by a French company, which provided technical services for the construction and maintenance of submarine cables to a Brazilian company. In the Special Appeal (No. 1.618.897 – RJ), the court was asked to dismiss the obligation to withhold Income Tax on the remittance of remuneration made to the French company, on the grounds that it violated the provisions of the aforementioned convention between the two countries.
The STJ’s position on the concept of “profit” for the purposes of international treaties and conventions was as follows:
the term profit of a foreign company should be interpreted not as real profit, but as operating profit, as the result of the activities, main or ancillary, that constitute the object of the legal entity, including, of course, the income paid in return for services rendered
To this end, he considered that the term “profit” of the foreign company is not limited to “real profit”, otherwise there would be no possible materiality on which the provision could be applied, since any payment or remuneration remitted abroad will always be subject to additions and subtractions throughout the financial year.
The fact that the income is only taxed in the state of destination allows the necessary adjustments to be made there to determine the actual taxable profit, so that allowing the tax to be withheld in advance – and therefore definitively – at the source of payment, prevents these adjustments, ruling out the possibility of offsetting if a negative real profit is determined at the end of the financial year.
This definition is of great importance for future relationships that may be established under international treaties, since this concept will be used to resolve any doubts involving the taxation of income.
Marcos Martins Advogados makes its tax team available to answer any questions on the subject.
