India-Brazil Double Taxation Avoidance Convention: Key changes under the Amending Protocol

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. To reinforce this, a new Article 26-A introduces a Limitation of Benefits (LOB) framework and a Principal Purpose Test (PPT). As per 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. The LOB clause restricts treaty benefits to ‘qualified persons’ (such as individuals, governments, or publicly listed companies), or those engaged in the active conduct of business (with certain exceptions depending on the ownership of the taxpayer). Importantly, entities operating as holding companies, engaged in making or managing investments, or providing overall supervision or administration of a group of companies, are not considered ‘qualified persons’ and will need to satisfy other criteria to access treaty benefits (for instance, satisfaction of active conduct of business test, 75% equivalent beneficial ownership test, etc.).

Significant updates have been made to the definition of permanent establishment (PE), including:

• Introduction of service PE: Article 5 has been broadened to include a ‘Service PE’ clause, in terms of which a service PE will be constituted 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. The treaty did not contain this clause earlier. This change will be relevant for service delivery business models and may increase the risk of constitution of PE in context of arrangements where employees are seconded to Indian group entities or where consultants or employees are hired in India by an entity in Brazil for providing services in India.
• Expansion of scope of agency PE: The definition of agency PE has also been expanded to cover persons who habitually play the principal role in leading contracts to conclusion without material modification by the enterprise. This is a key change directly impacting agency relationships. Brazilian entities with agents in India (and vice-versa) should carefully examine the scope of activities of their agents to avoid any adverse inference that could increase the risk of a PE being constituted.
• Anti-fragmentation rules: To curb tax avoidance through the splitting of contracts, the Protocol introduces strict anti-fragmentation rules such that activities cannot be artificially split across closely related entities to avoid PE status.

The Protocol reduces withholding tax caps on passive income streams as described below:

• 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%. The 365-day holding condition for the reduced dividend rate aligns with the Multi-Lateral Instrument (MLI) minimum holding period.
• 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%).

These changes are significant for Brazilian corporates with Indian subsidiaries (or vice-versa) as well as group licensing arrangements.

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 earned by Brazilian tax residents may now be taxed in India (and vice-versa) at a maximum rate of 10%. The prior treaty had no FTS-related provision. The 10% tax rate will now need to be factored into service delivery business models such as IT or Global Capability Centres (GCC) operations.

Modifications to Article 13, which governs capital gains, introduce provisions exclusively permitting the source country to tax gains derived from the alienation of shares in a company resident in that country. This is a key change that would be relevant for any M&A activity involving Indian or Brazilian targets.

Further, income arising to qualifying entities from the sale of ships or aircraft, or movable property pertaining to their operation, will be taxable only in the country of residence, rather than the place of effective management. This should reduce ambiguity, particularly in cases where treaty benefits were previously denied on the ground that the place of effective management was situated in a third jurisdiction.

Income derived by an enterprise from the operation of ships and aircraft in international traffic will be taxable only in the country of tax residence.

Similarly, profits derived by a transport enterprise from the use, maintenance or rental of containers, where such use is incidental to the operation of ships or aircraft in international traffic, will also be taxable only in the country of tax residence, unless the containers are used solely within the other country.