Category: Taxation

Background

The Brazilian and Swiss Governments signed a Double Tax Treaty (DTT) on 3 May 2018.

Switzerland is one of the biggest investors in the Brazilian market and Brazil and Switzerland have already signed an Automatic Exchange of Information Agreement, which came into force on 1 January 2018.

This new treaty, follows current OECD standards, including Base Erosion and Profit Shifting (BEPS) measures and anti-abuse rules and is anticipated to significantly increase investment between the two countries.

Main Impact

The new DTT not only introduces a number of tax advantages but also provides certainty in terms of tax treatment and will therefore generate increased confidence.

Key Measures

The Treaty is unique from a Brazilian perspective, as certain clauses are not included in any of Brazil’s other 33 DTTs.

• Dividends: will be taxed in the source country, up to the general limit of 15%.

The exception is companies holding more than 10% of the shares for at least one year, where the tax rate will be 10%.

The clauses relating to dividends are only relevant for dividends paid from Switzerland to Brazil. This is due to the fact that where dividends are paid from Brazil to Switzerland, existing domestic rules are more beneficial than the provisions of the Treaty.

• Interest: will be taxed in the source country, up to the general limit of 15%.

If the beneficial owner is a bank and the loan has been granted for at least five years, to finance the purchase of equipment or investment projects, the tax rate will be 10%.

Switzerland does not levy Swiss withholding tax on interest arising from regular loan agreements. However, interest on bonds and bank interest are generally subject to Swiss withholding tax.

• Royalties: will be taxed in the source country, up to the general limit of 10%.

The tax rate will be 15% for royalties arising from the use of trademarks. Technical assistance is included in the definition of royalties, whereas technical services are not.

Switzerland does not levy Swiss withholding tax on royalties.

Additional Important Clauses

Gains from the disposal of shares or comparable interests in ‘land-rich’ entities will be taxable in the country where the land is situated.

• A Swiss company receiving dividends from a Brazilian company will be entitled to the same relief, as if the company paying the dividends were resident in Switzerland, for Swiss tax purposes.

This provision allows a credit even if dividends are not taxed in Brazil (current withholding tax is zero).

Next Steps

The DTT needs to be approved by the Brazilian Congress and Swiss Parliament, before coming into force. It is difficult to anticipate, at this stage, precisely when this date will be, but it is likely to be in the first half of 2019.

Additional Information

If you would like further information regarding the potential for investment between Switzerland and Brazil, please speak to Christine Breitler, in our Swiss office: advice.switzerland@dixcart.com or to Catarina Sardinha: at the Dixcart office in Portugal: advice.portugal@dixcart.com.

South Africa, currently, hits the headlines for the ‘wrong’ reasons but it remains a jurisdiction where investment, in the correct manner, can be attractive.

The South African economy offers a diversity of sectors and industries. It has a modern and extensive transport infrastructure and  labour costs are priced competitively.

These factors, together with the country’s significant natural resources, have made it an investment destination worth consideration.

South Africa and Withholding Tax

South Africa does not levy a withholding tax on interest and royalties paid to non-residents. The withholding tax rate on dividends is 5% if the dividend is received by a company which holds at least 10% of the capital of the dividend paying company. 10% in all other cases.

The Double Tax Agreement between Cyprus and South Africa

The initial Cyprus-South Africa DTA was signed in 1997, and a Protocol was signed in April 2015, which amended certain key clauses.

• The Cyprus-South Africa DTA remains very attractive and reduces withholding tax on interest and royalties to zero.

In terms of dividends, the following amounts of withholding tax are payable:

• 5% – if the beneficial owner of the company holds at least 10% of the capital of the company paying the dividend.
• 10% – in all other cases.

Dividend payments from Cyprus continue to enjoy a zero rate of withholding tax. The withholding tax payments for dividends, detailed above, only relate to the payment of dividends from South Africa.

The Exchange of Information article was revised in 2015, in line with the OECD Model Tax Convention.

Use of Cyprus Financing Companies for South Africa

There are benefits in using Cyprus companies as financing companies for South Africa.

The advantages relate to the zero withholding tax rate on interest payments from South Africa to Cyprus and the low 12.5% rate of corporation tax applied to any margin on the interest in Cyprus. In addition, no withholding tax is applicable on interest payments from Cyprus.

Cyprus as a Location for the Holding of Intellectual Property (IP) exploited in South Africa

Cyprus is an efficient jurisdiction in which to hold intellectual property that is to be exploited in South Africa:

• Zero withholding tax on royalty income paid from South Africa to Cyprus.
• Subject to certain conditions, only 20% of royalty income is taxed in Cyprus. Application of the Cyprus corporate tax rate of 12.5% therefore provides an effective tax rate of 2.5%.
• It is possible to transfer profits from a Cyprus company without there being withholding tax payable on dividends or on onward royalty payments.
• On disposal of the IP rights, 80% of the proceeds are exempt from corporation tax in Cyprus.

Other Advantages Offered by the Jurisdiction of Cyprus

Cyprus offers a number of other important benefits:

• Profits from a permanent establishment located outside of Cyprus are exempt from Cypriot tax as long as no more than 50% of the income has arisen from investment income (dividends and interest).
• There is no capital gains tax. The only exception to this is on gains from the sale of immovable property in Cyprus or shares in companies owning such property.
• The availability of tax rulings from the Cypriot Tax Authority make tax planning a more certain and efficient process.
• No withholding tax on dividends, interest and royalties.
• No tax on dividend income.
• No tax on income or gains derived from the disposal of securities.
• Shipping regime whereby tax is based on an annual tonnage rate instead of a corporate tax.

Summary

The Double Tax Agreement between Cyprus and South Africa is very favourable, due  to its zero withholding tax on interest, royalties and dividends paid from Cyprus, and its relatively low rate of withholding tax on dividends paid from South Africa.

This can be particularly tax efficient for the holding of IP in Cyprus that is to be exploited in South Africa, and the use of Cyprus financing companies for South Africa.

Additional Information

If you require any additional information regarding the benefits available through the Double Tax Agreement between Cyprus and South Africa, or have any questions relating to the advantages that the jurisdiction of Cyprus offers, please speak to Charalambos Pittas at our office in Cyprus: advice.cyprus@dixcart.com.