The Brazilian tax authorities issued on 20 March 2006 Declaratory Interpretative Act 4 concerning theBrazil-Spain income tax treaty of 14 November 1974 (which serves as an official interpretation issued by the Brazilian tax authorities), setting forth their understanding in connection with payments of dividends, royalties and technical service fees under the treaty.
Following a previous Declaratory Interpretative Act issued on 21 December 2004 and as a result of the application of the most favoured nation clause included in the protocol to the treaty and according to the terms set out in the treaty between Brazil-Israel, the treaty rates applicable as of 1 January 2006 are as follows:
| - | Art. 10 (Dividends). The applicable withholding tax rate is reduced to 10% from 15%, provided the beneficial owner is a Spanish company which owns directly at least 25% of the capital of the Brazilian company paying the dividends. Nevertheless, it should be noted that under Brazilian domestic law, dividends and other profit distributions paid to non-residents are exempt from income tax; and | |
| - | Art. 12 (Royalties). The withholding tax rate is reduced to 10%, with the exception of trademark royalties, which remain subject to tax at 15%. |
In addition to the rate changes, the Declaratory Interpretative Act also clarifies that all technical or scientific services (in respect to agreements registered with the Brazilian Institute for Industrial Property) are included within the concept of royalties, irrespective of whether or not a transfer of technology occurs. However, an exception is made for technical services of a professional character performed by qualified persons or groups of persons, which fall under Art. 14 (Independent Personal Services). Finally, the Declaratory Act also states that technical services do not fall under Art. 22 (Other Income) and that the scope of application of Art. 7 (Business Profits) to such technical services is considered reduced.