Direct Tax Quarterly Milestones (January-March 2026)

The Government of India has notified the 2022 Protocol amending the Double Taxation Avoidance Agreement between India and Brazil (Protocol). With the Protocol having entered into force on 18 October 2025, the amended provisions will take effect in India for income arising in any tax year beginning on or after 1 April 2026. These amendments significantly modernise the existing treaty, primarily to align it with global Base Erosion and Profit Shifting (BEPS) standards.

A foundational change is the replacement of the treaty’s preamble, which now explicitly states the mutual intent to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or treaty-shopping. Further fortifying this anti-abuse stance, a new Article 26A has been inserted, introducing both a Limitation of Benefits (LOB) framework and a Principal Purpose Test (PPT). Under the PPT, treaty benefits may be denied where it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction.

Some of the other significant amendments include:

• Introduction of service PE: Article 5 has been significantly broadened. Notably, a ‘Service PE’ clause has been introduced, which is triggered when an enterprise furnishes services (including consultancy services) through employees or other personnel for a period aggregating more than 183 days within any 12-month period.

• Expansion of agency PE: The definition of agency PE has also been expanded to cover persons who habitually play the principal role in leading the contracts to conclusion without material modification by the enterprise.

  To curb tax avoidance through the splitting of contracts, the Protocol introduces strict anti-fragmentation rules to encourage cohesive business operations.

• Reduction of withholding tax rates: The amending Protocol reduces withholding tax caps on passive income streams:
  • Dividends: The withholding tax rate is now capped at 10% for beneficial owners that are companies holding at least 20% of the paying company’s capital directly throughout a 365-day period. For all other cases, the rate remains 15%.
  • Interest: The rate is reduced to 10% in cases where the beneficial owner is a bank and the loan has been granted for at least five years to finance equipment or investment projects. A 15% rate will continue to apply in all other scenarios.
  • Royalties: The tax rate for royalties arising from the use or right to use of trademarks is capped at 15% (instead of 25%), while the rate for all other types of royalties has been reduced to 10% (instead of 15%).
• Inclusion of provision for fees for technical services: Relatedly, Article 12A has been inserted to explicitly govern taxation of fees for technical services (FTS). Defined as payments in consideration for services of a managerial, technical, or consultancy nature, FTS may now be taxed in the source country at a maximum rate of 10% of the gross amount of the fees.
• Amendment to capital gains: Modifications to Article 13 introduce provisions exclusively permitting the source country to tax gains derived from the alienation of shares in a company resident in that state.

Overall, the Protocol marks a significant shift towards a more modern, source-oriented and anti-abuse driven treaty framework between India and Brazil. While certain amendments rationalise withholding tax rates and provide greater certainty, particularly through the introduction of a dedicated provision for fees for technical services, the expanded scope of permanent establishment and strengthened anti-abuse rules (including PPT and LOB), collectively signal a tighter regime for claiming treaty benefits.

Taxpayers with cross-border structures or transactions involving India and Brazil should closely evaluate the impact of these changes, particularly in relation to service arrangements, holding structures, and financing flows, to ensure continued eligibility for treaty benefits and alignment with the revised provisions.

The Supreme Court of India delivered an important ruling in the Tiger Global¹ case, marking a shift in India’s evolving jurisprudence on the interpretation and application of tax treaties. Most notably, it requires holding companies to demonstrate commercial substance to claim capital gains tax benefits, overriding grandfathering provisions for investments made prior to 1 April 2017 in India’s tax treaties and the Income Tax Rules.

To read our detailed analysis of the Supreme Court’s ruling and its ramifications, click here.