By Raphael Scheffer Lima and Gabriel Henrique Santos Nunes

The First Section of the Brazilian Superior Court of Justice (STJ) has addressed, through Special Appeal No. 2,060,432, the issue of Withholding Income Tax (IRRF) on payments sent abroad for services provided by foreign entities. This decision, made under the repetitive appeal system, will bind all levels of the judiciary, underscoring its legal and economic significance.

The STJ has ordered the suspension of all related proceedings in the first and second instances, including those under review by the Superior Court itself. This measure aims to ensure legal certainty and consistency in future rulings.

The issue is of particular interest to Brazilian companies that procure technical services from countries with which Brazil has double taxation treaties. The controversy revolves around determining the location of taxation: solely in the service provider’s country of residence or cumulatively in both Brazil and the foreign country.

Key Articles from the OECD Model Convention

To understand the debate, it is essential to analyze three articles from the OECD Model Convention, which serves as a reference for Brazil’s international treaties:

• Article 7 – Business Profits: Establishes exclusive taxation in the country of residence (taxation only abroad).
• Article 12 – Royalties: Allows for cumulative taxation in both states (taxation in both countries).
• Article 21 – Other Income: Authorizes taxation at the source (taxation only in Brazil).

Additionally, the protocols of double taxation treaties must be examined, as some of these protocols stipulate that payments for technical services, regardless of their nature, should be treated as royalties and, therefore, taxed in both countries.

Evolution of the Debate on Technical Services Taxation

The interpretation of taxation on technical services provided by foreigners to Brazilian companies has undergone significant shifts in recent years, with varied stances from Brazil’s tax authority and judiciary. This evolution can be divided into four key phases:

1. 2000 – Initial Position by the Brazilian Tax Authority (RFB): The RFB issued Declaratory Act Cosit No. 01/2000, stating that technical services without technology transfer should be classified as “other income” under Brazil’s double taxation treaties. This classification meant such services would be taxed in Brazil, favoring Brazilian tax collection.
2. 2012 – Taxpayer Victory at the STJ: In 2012, the STJ’s Second Chamber, in the judgment of REsp No. 1,161,467/RS, ruled that payments for technical services should be treated as “business profits.” This interpretation implied taxation exclusively in the provider’s country of residence, representing a significant reduction in the tax burden for taxpayers in Brazil.
3. 2014 – Adjusted Stance by the RFB: In response, the RFB issued Declaratory Interpretative Act No. 05/2014, adopting a more balanced approach. For treaties explicitly classifying technical services without technology transfer as royalties, the RFB argued such payments should be taxed under Article 12 of the OECD Model, allowing for taxation in both countries depending on the treaty terms.
4. Recent STJ Rulings Favoring the RFB: Recently, the STJ’s Second Chamber has aligned more closely with the RFB’s interpretation, ruling that treaties explicitly treating technical services without technology transfer as royalties should be respected. This stance supports Brazilian tax authorities by allowing taxation in Brazil when specified in international treaties.

Implications of the STJ’s Pending Repetitive Appeal Decision

Taxpayers argue that even when protocols classify these services as royalties, payments should be treated as “business profits,” as royalties require a transfer of technology rather than merely providing technical expertise. (The debate on what constitutes a service involving technology transfer will be explored in a subsequent article, given its complexity.)

The STJ’s upcoming repetitive appeal decision aims to provide uniformity on the matter, potentially applying modulation of effects. If the STJ rules against withholding IRRF on payments abroad for the mentioned services, companies that filed lawsuits before the decision’s modulation could seek refunds for amounts paid in the last five years as IRRF on such services.

The Tax Law Department at Marins Bertoldi Advogados remains vigilant regarding developments on this critical topic and is available to provide additional clarifications and specialized legal assistance.