Tax Treaty Case Law around the Globe 2015

S. 69Brazil: CFC Rules and Tax Treaties in Brazil: A Case for Article 7

Luís Eduardo Schoueri/Mateus Calicchio Barbosa

I. S. 70Introduction

An anti-avoidance rule aimed at taxing profits earned abroad by controlled entities and retained in low or nil-tax jurisdictions, CFC legislation was expected to be blocked by Article 7 of the Model Convention and its plain wording: profits of a foreign subsidiary, whether a base company or not, shall be taxable only in the (foreign) state where it resides if no permanent establishment is found in the state of its parent. After all, this provision on business profits is regarded as a “cornerstone for the assignment of taxing rights” in a treaty, and the clear, simple limitation Article 7 entails should be enough to prevent a contracting state from imposing taxation on the profits earned by the CFC in the other contracting state.

Though appearing difficult to reject, this conclusion had to be reaffirmed by courts worldwide in judgments dealing with what was referred to as a clash between the CFC regime’s consolidation-type approach – taxing the foreign income in the hands of the parent – and the separate entity approach underlying tax treaties – recognizing t...