In a recent decision, the Regional Federal Court of the 3rd Region (“TRF 3”) decided that the Withholding Income Tax (“IRRF”) must not be charged on international remittances made by a Brazilian company for the payment of technical services provided by a company headquartered abroad.
The decision involves a lawsuit filed by a beverage company to discuss the Brazilian Federal Revenue Service (“RFB”) understanding that payments for such services must receive the royalties tax treatment, subject to a IRRF rate of 15%, regardless of whether the service provided involves transfer of technology or not.
Analyzing the case, the judges of the 4th Panel of TRF 3 understood that the agreement to avoid double taxation did not intend to expand or change the concept of royalties, only to expressly include the provision of technical services in the treaty, rejecting the Tax Authorities arguments.
In this sense, technical services would constitute profit of the service provider abroad, subject to taxation in the country of its location. The provision of technical services will only be subject to IRRF when the contract provides some form of transfer of technology or know-how case in which the remittances will be classified as the payment of royalties. The conclusion is that there is no transfer of technology if the foreign company only applies its own knowledge to perform the contracted support service.
Therefore, after analyzing the applicable Double Taxation Treaty, it is important to assess the filling of a judicial measure to exempt international remittances from IRRF made in payment for technical services or technical assistance that do not involve technology.