Corporate Tax 2019 Comparisons

Last Updated January 17, 2019

Contributed By Machado Associados

Law and Practice

Authors



Machado Associados Machado Associados is a highly specialised law firm with a leading international profile, as demonstrated by the many international transactions the firm has conducted since its foundation. The tax department is composed of the consulting and litigation practices formed by four working teams: corporate tax, VAT taxes, litigation and international taxation. The firm's services include: assessment of tax impacts on transactions carried out by companies, and advice on the use of tax credits and compliance with main and ancillary tax liabilities, also regarding their accounting effects; assistance in structuring and restructuring business operations, M&A, joint ventures, asset deals, sales of commercial establishments and corporate reorganisations; assistance for Brazilian companies to expand overseas, by assessing the best legal structure to set up new businesses in other countries, from a corporate, tax, labour and accounting standpoint, and also guiding companies as to the best use of the applicable provisions of the various international double taxation avoidance agreements entered by Brazil; assistance for Brazilian and foreign individuals in all matters related to income tax including preparing and/or reviewing income tax returns; performance of tax-related procedure reviews; advisory for compliance with federal, state and municipal tax-related inspections.

Businesses in Brazil are generally organised as corporations (S/A) or limited liability companies (Ltda).

The S/A usually has higher maintenance costs due to the need to publish several corporate and accounting documents. While an S/A may be publicly held (with shares, bonds and other securities publicly traded) or closely held, an Ltda must be closely held.

Both types of corporate forms must have at least two shareholders (exceptions apply). The liability of the shareholders of an S/A is limited to the issuance price of the shares subscribed or acquired by them, while the liability of the quota-holders of an Ltda is limited to the corporate capital of the company. There are no minimum corporate capital requirements for an S/A or Ltda.

Businesses in Brazil may also be organised as limited liability individual companies (EIRELI), branches of foreign companies, Silent Partnerships (SCP) or consortiums.

An EIRELI is formed by one individual or legal entity, with at least BRL954 (approximately USD238) corporate capital. The rules provided for the Ltda shall apply to the EIRELI, as appropriate.

Setting up a branch of a foreign company in Brazil is subject to a special permit granted by the federal government and can be time-consuming. Therefore, the structure is only recommended in specific cases.

S/A, Ltda, EIRELI and branches of foreign companies are taxed as separate legal entities in Brazil.

An SCP is formed by at least two partners by means of a private instrument to carry out a specific activity. The ostensible partner is responsible for performing the activities of the SCP. The remaining partners do not appear to third parties and are only liable for their obligations with the ostensible partner. Practical complications arise for the setting up of a SCP with non-resident partners.

Although it is not vested with legal capacity, the SCP is treated as a legal entity for the purposes of Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL). The ostensible partner is liable for the compliance of the SCP's tax obligations.

A consortium is formed by two or more companies in order to carry out a specific project (usually in the field of construction) for a predetermined period of time. A consortium is not considered a separate legal entity. The consortium agreement establishes the liability of each member and the results to be attributed to each of them. Specific accounting and tax rules must be observed by the members of a consortium.

Although Brazilian law does not provide for the existence of typical tax-transparent entities, it does have a very specific investment fund regulation. 

In Brazil, funds are tax-transparent entities with no legal capacity, generally used for specific investments such as for investment in shares, immovable property, other funds, and infrastructure, among others. The quota-holders of the fund are subject to taxation, depending on whether they reside in Brazil or abroad, if they are legal entities or individuals, and if the fund is classified as an open or closed fund and as a long-term or short-term investment. 

The regulations of investment funds have undergone significant alterations in past years, eliminating certain tax benefits, and several fund structures have been dismantled. Investors are migrating to regular corporate form structures. 

In principle, a business is considered to be resident in Brazil if it is incorporated in Brazil.

Brazilian legal entities (as well as businesses taxed as legal entities) are subject to the levy of IRPJ and CSLL at a combined general rate of 34%.

The general IRPJ rate is 15%, and a 10% surcharge applies to taxable income exceeding BRL240,000 per year (approximately USD60,000).

CSLL is generally due at a rate of 9%. A 15% CSLL rate applies for banks, securities dealers, exchange and securities brokers, insurance companies and credit co-operatives, among others, as of January 2019 (a 20% rate applies until December 31, 2018, with the exception of credit co-operatives, which are subject to a 17% rate).

The effective tax rate may vary according to the system adopted by the Brazilian legal entity to calculate IRPJ and CSLL (actual profit system, deemed profit system or arbitrated profit system).

Small-sized companies (with annual gross revenues of up to BRL4.8 million – approximately USD1.2 million) that are owned by individuals residing in Brazil and that comply with certain requirements may also choose to adopt the Special Tax Regime for Small Businesses (SIMPLES), under which most federal, state and municipal taxes, including IRPJ, CSLL and Social Contributions on Revenues (PIS and COFINS), are levied at combined rates ranging from 4% to 33% (variable according to the gross revenue accrued by the company and the type of activity), which may represent a significant reduction in taxation in comparison to the regular system.

Dividends are not subject to Withholding Income Tax (WHT), regardless of the beneficiary of the income (individual or legal entity, resident or non-resident).

In principle, Brazilian legal entities may calculate the taxable basis of IRPJ and CSLL based on one of the three following systems: actual profit, deemed profit or arbitrated profit. Certain legal entities are mandatorily subject to the actual profit system (eg, companies with total revenues higher than BRL78 million – approximately USD19.5 million – in the previous year, financial institutions, and companies earning profits from abroad, among others).

Under the actual profit system, taxable profits are determined based on the accounting net profit, adjusted in accordance with the addition of non-deductible expenses and the exclusion of certain amounts.

Examples of additions include most provisions, with the exception of those expressly authorised by law (eg, vacations, 13th month salary), the IRPJ and CSLL, royalties paid abroad exceeding the deduction limits provided by law, and losses resulting from evaluating investments according to the equity pick-up method.

Exclusions include depreciation expenses calculated based on tax rates, revenues resulting from evaluating investments according to the equity pick-up method, and the goodwill paid on the acquisition of an equity stake in other Brazilian legal entities, if conditions established by law are complied with.

Although taxation occurs on an accrual basis, cash-basis taxation may apply to specific cases, such as foreign exchange revenues or expenses, gains derived from the sale of fixed assets for long-term payment, and revenues derived from agreements for the supply of goods or services to be produced/provided within a term of more than one year, for a predetermined price, along with other methods of taxation.

The taxable basis under the deemed profit system is calculated based on certain percentages on the company’s gross revenues, which may vary according to the activity performed by the company (eg, sales: 8% for IRPJ and 12% for CSL; services: 32% for both taxes). Other revenues may be subject to other specific percentages, or may be fully added to the taxable basis. Expenses are non-deductible under the deemed profit system, and the offsetting of tax losses is not allowed. The legal entity subject to the deemed profit system may choose to be taxed on an accrual or cash basis.

The arbitrated profit is similar to the deemed profit, but for IRPJ purposes the taxpayer must increase the applicable deemed percentages by 20%. This system is only used in very specific cases, such as when the company’s accounting records are not reliable.

Legal entities that carry out research into new products, new manufacturing processes and improvements in the quality, productivity and competitiveness of existing products and manufacturing processes may benefit from incentives of IRPJ, CSLL and other taxes.

IRPJ and CSLL technology investment benefits include full depreciation of new fixed assets used for R&D purposes in the year of acquisition, accelerated amortisation of intangibles acquired for R&D purposes, and deduction of expenses with R&D plus the tax exclusion of 60% to 100% of such expenses (conditions must be met).

Other tax benefits are granted for R&D activities, such as a 0% WHT on payments to non-residents for the registration and maintenance of trade marks, patents and cultivars abroad, and a 50% reduction of the Excise Tax (IPI) levied on the purchase of assets destined for technological R&D.

Brazilian federal and state legislation provides for several incentives for certain industries and specific financing transactions.

REIDI is a special tax incentive that is applicable to infrastructure projects in the areas of transportation, ports, energy, sanitation and irrigation. Under this regime, sales and imports of certain goods and services, as well as leases of machines, equipment and tools to be used in or integrated into the infrastructure projects accredited with the REIDI, are subject to the suspension of the PIS and COFINS, which is converted into a zero rate upon the use and incorporation of such goods and services into the infrastructure projects.

REPETRO is a special regime for the oil and gas sector, under which the import of certain equipment, machinery and parts may benefit from the suspension of customs taxes and taxes on import, among other benefits.

Expenses and depreciation/exhaustion charges related to the exploration and production of oil and natural gas may also be fully deducted from the IRPJ and CSLL taxable basis. An exemption of WHT on remittances abroad may also apply. 

Under RECOF, the industrial warehouse regime, the imports and domestic acquisitions of inputs used for the manufacturing of goods and for the maintenance/repair of certain used foreign goods benefit from a suspension of customs duties, IPI, PIS and COFINS.

Manaus Free Trade Zone (ZFM) tax incentives are applicable for the manufacturing process in the ZFM, for imports of certain inputs to be manufactured or consumed in the ZFM, and for the shipment of products from the Brazilian territory to the ZFM, among others. Reductions and exemptions may apply to Import Tax (II), IPI, IRPJ, CSLL, ICMS, PIS and COFINS.

Tax incentives for the Brazilian automotive sector are also being implemented by the federal government (Route 2030 Programme – Mobility and Logistics).

Interest paid in relation to debentures destined for infrastructure projects may also benefit from a WHT reduction.

Rules on the offsetting of tax losses only apply to legal entities that are subject to the actual profit system of taxation (as such, offsetting is not allowed under the deemed profit system).

Tax losses may be offset against future taxable profits, up to a limit of 30% of the taxable profit, without any time limit. No carry-back is allowed.

Tax losses arising from the sale of fixed assets, investments and intangibles may only be offset against future non-operating profits, subject to a 30% limit.

If the Brazilian entity undergoes a change of control and business activities after the losses were accrued, the losses may not be offset against future profits.

Certain corporate transactions may also limit the Brazilian legal entity’s right to offset tax losses: as a result of a spin-off, the surviving entity loses the right to offset the portion of the losses proportional to the spun-off part of its net worth; as a result of a merger, the surviving company may not offset the losses accrued by the merged legal entity against its own profits.

Brazilian legal entities that are subject to the actual profit system of taxation may deduct interest as long as such expenses are necessary, normal and usual for it to perform its activities. If the loan is granted by a foreign related party or parties domiciled in tax havens or subject to privileged tax regimes (either related or unrelated), thin-capitalisation rules and transfer pricing rules must be observed.

According to Brazilian thin-capitalisation rules, interest paid/credited to a related party abroad shall only be tax deductible if the debt does not exceed twice the value of the Brazilian legal entity’s net worth (2:1 debt to equity ratio). If the related party holds an equity stake in the Brazilian legal entity, the debt shall not exceed twice the value of the equity stake held by the related party in the Brazilian legal entity’s net worth. Collective limits also apply if the Brazilian legal entity owes more than one loan. 

If the Brazilian legal entity borrows funds from parties that are domiciled in tax havens or subject to privileged tax regimes, the debt to equity ratio is reduced to 0.3:1.

As per Brazilian transfer pricing rules, loan interest deductibility limits shall be calculated by applying the USD Libor rate for six months' deposits (other rates may apply depending on the currency of the transaction and whether or not the interest is predetermined), plus a 3.5% spread.

Brazil does not allow the consolidated tax grouping of results of Brazilian legal entities. Each legal entity is taxed individually, offsetting tax losses against their own future taxable profits.

Capital gains arising from the sale of fixed assets, investments in other corporations and intangibles are included in the taxable basis of IRPJ and CSLL, due at a combined rate of 34%. Under the actual profit system, gains derived from the sale of such assets for long-term payment may be taxed on a cash basis instead of the general accrual basis.

Capital gains result from the positive difference between the sale price and the accounting value of the asset sold. In investments in other corporations registered as non-current assets for accounting purposes, the accounting value of the investment is composed of the net worth value for which the investment is registered, and the surplus, deficit and goodwill registered upon the acquisition of the investment.

The sale of fixed assets, investments in other corporations and intangibles classified as non-current assets for accounting purposes is not subject to any other taxes in Brazil, other than IRPJ and CSLL that are levied on the capital gains.

However, if the shares in another corporation are classified as a current asset for accounting purposes, revenues arising from the sale of such equity stake are mandatorily subject to 4.65% PIS and COFINS, according to the cumulative system (thus, no PIS and COFINS credits are available). In this case, the amounts spent on the acquisition of such equity stake may be excluded from the taxable bases of PIS and COFINS.

If the purchase price is paid by an acquirer domiciled abroad, the currency exchange transaction performed for the remittance of funds into Brazil shall be subject to the levy of the Tax on Financial Transactions (IOF-Exchange) at the general rate of 0.38% (exceptions apply).

In addition to IRPJ and CSLL, Brazilian legal entities may be subject to several other federal, state and municipal taxes, depending on the activities performed. The rates for state and municipal taxes will vary depending on where the taxpayer is located and/or the activities performed. 

PIS and COFINS are federal social security contributions levied on revenues, and may be calculated according to the non-cumulative system (generally applicable to legal entities that are subject to the actual profit system for IRPJ and CSLL purposes) or the cumulative system (generally applicable to legal entities that are subject to the deemed profit system for IRPJ and CSLL purposes).

Under the non-cumulative system, PIS and COFINS are levied on gross and other revenues of legal entities at a combined rate of 9.25% (certain tax credits are allowed by law). Financial revenues are generally subject to a lower combined rate of 4.65%. In the cumulative system, gross revenues earned by legal entities are taxed at a combined rate of 3.65% (no tax credits are allowed).

IOF is a federal tax levied on exchange, credit and securities transactions, among others, at different rates. The general rate applicable to foreign exchange transactions is 0.38%.

IPI is a federal tax charged on the domestic shipment of goods from a manufacturing entity or on the import of goods (upon customs clearance). Applicable rates vary, according to the essentiality of the good.

ICMS is a state value-added tax levied on imports of goods, the circulation of goods in the Brazilian territory, inter-municipal or interstate transport services (including services originating from abroad), and communication services (including services originating from abroad). ICMS rates on local transactions range from 4% to 39%, and rates on import transactions range from 17% to 39%. Tax credits are available. 27 different laws and normative acts apply. The import of goods may be subject to other taxes at the federal level.

Tax on Services (ISS) is a municipal tax on services levied on the import and the rendering of services, at rates ranging from 2% to 5%. More than 5,000 laws and normative acts apply. The import of services may be subject to other federal taxes.

In some cases, such as with digital products, states and municipalities may disagree on whether the transaction is subject to ICMS or ISS.

Closely held Brazilian businesses usually operate in corporate form in Brazil, as Brazilian legislation does not provide for many non-corporate alternatives. In addition, operation through a corporate form guarantees the restriction of the shareholders’ liability to the amount invested in the company.

Furthermore, depending on the tax system adopted by the Brazilian legal entity, the effective taxation imposed on businesses operating through corporate forms may be lower than that imposed on individuals.

Effective taxation of legal entities may be lower than that applied to individuals (individual income tax is levied at progressive rates of up to 27.5%) when, for example, the legal entity is subject to the deemed profit system for IRPJ and CSLL purposes and to the cumulative system for PIS and COFINS purposes. 

Although there are no rules expressly prohibiting individual professionals from earning income at corporate rates, tax authorities tend to question structures that are set up with the sole purpose of reducing taxes. 

Brazil does not provide for any rules restricting corporations from accumulated earnings, as WHT is not levied upon the distribution of dividends.

Dividends received by individuals residing in Brazil from Brazilian closely held corporations are not subject to taxation in Brazil.

Capital gains ascertained by individuals upon the sale of shares in closely held corporations are subject to income tax at progressive rates of 15% up to 22.5%.

Dividends received by individuals residing in Brazil from Brazilian publicly traded corporations are not subject to taxation in Brazil.

Capital gains ascertained by individuals upon the sale of shares in publicly traded corporations are subject to income tax at progressive rates of 15% up to 22.5%.

Remittances abroad for the payment of interest, interest on net equity (JCP, a special form to remunerate shareholders calculated on the company’s net worth) and royalties are generally subject to 15% WHT in Brazil. If the beneficiary is domiciled in a tax haven, the rate is increased to 25%.

Certain WHT reductions are granted to foreign investors, provided some requirements are met (eg, in case of bonds issued to fund investments).

Dividend remittances are not subject to WHT in Brazil, regardless of the beneficiary of the income.

Other taxes may apply to royalty remittances depending on the right that is being remunerated (eg, discussions may arise if the licensing of trade marks is subject to Tax on Services - ISS).

Brazil has concluded tax treaties with Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Norway, Peru, the Philippines, Portugal, Russia, Slovakia, South Africa, South Korea, Spain, Sweden, Trinidad and Tobago, Turkey, Ukraine and Venezuela.

The treaties for investment used most in Brazil include the Netherlands, Luxembourg, France and Japan. 

Brazilian tax authorities tend to have a very restrictive view of the application of tax treaties, generally denying the application of clauses that do not allow Brazil to tax amounts that would have been taxed according to local legislation.

In addition, certain treaties signed by Brazil include beneficial ownership clauses or limitation of benefits clauses, which limit the application of the treaties to some situations. 

Multinational groups tend to face transfer pricing issues in Brazil when operating through a local corporation due to the significant differences between the Brazilian transfer pricing rules and what is practised by other countries (including the OECD standards). 

These differences and the fact that tax treaties concluded by Brazil do not provide for compensating adjustments can lead to double taxation within the group, reducing competitiveness. 

As Brazilian transfer pricing rules are based on a mathematical approach and, in some cases, on fixed profit margins, the fact that the distributor has limited risk in a transaction should not, in itself, lead to questioning by the Brazilian tax authorities. 

However, tax authorities tend to question the transfer pricing calculations performed by Brazilian taxpayers if they are not in line with applicable rules, or if the supporting documentation is unreliable.

Although Brazilian transfer pricing rules are inspired by OECD standards, they differ significantly from the guidelines.

Brazilian rules do not provide for any profit-based methods (profit split or transactional net margin methods). As a result, Brazilian legal entities must prove their compliance with transfer pricing rules by using the comparable, resale profit method or the cost plus method. The use of comparables is restricted due to the absence of databases. The resale price and the cost plus methods are based on fixed profit margins established by law, regardless of the functions and risks undertaken by the parties.

In principle, of the three methods outlined above, Brazilian legal entities may choose the one that leads to the lowest adjustment. No best method rule applies. 

The concept of related parties adopted in Brazil is much broader than the concept of “associated enterprises” considered by OECD standards. In addition to transactions with associated enterprises, Brazilian transfer pricing rules also apply to transactions between a Brazilian legal entity and a foreign company when the same individual/legal entity holds an equity stake of at least 10% in both the foreign company and foreign legal entities that grant or are given exclusive rights to buy or sell assets, goods, services or rights (agent, distributor or dealer). Such rules also apply to transactions with legal entities that participate with the Brazilian company in a joint enterprise, under a consortium or condominium, as defined by the Brazilian law, among others.

Brazil does not provide for compensation adjustments to avoid double taxation, unless the transactions are performed with foreign companies that are controlled by the Brazilian legal entity (and certain conditions are complied with).   

Advance Pricing Agreements (APA) are not possible in Brazil. 

Tax treaties entered into by Brazil do not provide for compensating adjustments. However, Brazilian CFC rules allow Brazilian legal entities to exclude transfer pricing adjustments arising from transactions performed with foreign-controlled companies if the profits of these foreign entities are taxed in Brazil on an accrual basis, provided certain conditions and limits are respected.

According to law, such compensating adjustments are only allowed if the transfer pricing adjustment was made spontaneously by the taxpayer (ie, when the transfer pricing adjustment is not required by tax authorities).

Although provided for in double tax treaties signed by Brazil, Mutual Agreement Procedures (MAP) were only regulated by local legislation in December 2016. As such, the effectiveness of the procedure in Brazil is not yet tested.

Considering that, as mentioned, treaties signed by Brazil do not provide for compensating adjustments, it is not expected that MAPs would help avoid double taxation arising from transfer pricing claims.

In Brazil, branches of foreign companies are taxed as Brazilian legal entities.

Capital gains accrued by non-residents from the sale of goods and rights located in Brazil are subject to WHT at progressive rates of 15% up to 22.5%. If the beneficiary of the capital gain is domiciled in a tax haven, a WHT rate of 25% applies. Gains on the sale of shares and securities purchased by non-residents in the Brazilian financial and capital markets that comply with certain conditions set out by the Brazilian Central Bank are subject to 0% WHT.

Although Brazilian rules do not expressly provide for the taxation of the capital gain arising from the sale of shares in a non-local holding company that owns the stock of a local corporation directly, tax authorities have challenged structures in which the non-local holding company was interposed in the structure just to avoid the payment of WHT.

Treaties signed by Brazil usually provide that both the State of residence and the State in which the shares are located can tax capital gains with no treaty benefits, generally providing for the credit method to avoid double taxation on capital gains. Certain treaties provide for the application of the exemption method.

Although Brazilian laws do not provide for any taxation in the case of change of indirect control of a Brazilian legal entity, the company’s right to offset its tax losses against future profit shall be restricted if such a change occurs concurrently with a change to the company’s business activities. The purpose of this rule is to avoid the commercialisation of tax losses.

Brazilian law does not provide for any formulas to determine the income of foreign-owned local affiliates.

Payments made by local affiliates to non-local affiliates for management and administrative expenses shall be considered tax-deductible if they are necessary, normal and usual expenses related to the performance of the company’s activities/undertakings, if there is sufficient documentation to evidence the rendering of the services, and if the transfer pricing rules are complied with (if applicable). 

Compliance with Brazilian transfer pricing rules may not be necessary for the deduction of the expenses if they are related to a cost-sharing agreement and comply with certain conditions listed in rulings and case law (no profit margin is charged, the allocation keys are reasonable and objective, among others).

If a loan is granted to a Brazilian legal entity by a foreign related party or parties domiciled in tax havens or subject to privileged tax regimes (either related or unrelated), thin-capitalisation rules and transfer pricing rules must be observed.

According to Brazilian thin-capitalisation rules, interest paid/credited to a related party abroad shall only be tax deductible if the debt does not exceed twice the value of the Brazilian legal entity’s net worth (2:1 debt to equity ratio). If the related party holds an equity stake in the Brazilian legal entity, the debt shall not exceed twice the value of the equity stake held by the related party in the Brazilian legal entity’s net worth. Collective limits also apply if the Brazilian legal entity owes more than one loan.

If the Brazilian legal entity borrows funds from parties that are domiciled in tax havens or subject to privileged tax regimes, the debt to equity ratio is reduced to 0.3:1.

As per Brazilian transfer pricing rules, loan interest deductibility limits shall be calculated by applying the USD Libor rate for six months' deposits (other rates may apply depending on the currency of the transaction and whether or not the interest is predetermined) plus a 3.5% spread.

Local corporations are subject to the levy of IRPJ and CSLL on their worldwide income, including capital gains and profits arising from Brazilian investments abroad, on December 31st of the year in which the income was accrued (the taxable year in Brazil is the calendar year).

Brazilian law allows for the taxes paid abroad to be credited against the IRPJ and CSLL due in Brazil, in order to avoid double taxation of these amounts.

As foreign income is subject to taxation in Brazil, expenses related to that income shall be considered as tax-deductible if they are necessary, usual and normal to the activity of the Brazilian legal entity.

In principle, dividends distributed by foreign subsidiaries of local corporations are not subject to tax in Brazil, as, according to Brazilian CFC rules, profits accrued by foreign subsidiaries of local corporations are subject to tax in Brazil on an accrual basis, regardless of distribution.

Intangibles developed by local corporations can be used by non-local subsidiaries. If the non-local subsidiary is considered a related party of the Brazilian legal entity under Brazilian transfer pricing rules, or if the non-local subsidiary is located in a tax haven or subject to a privileged tax regime, Brazilian rules would, in principle, require the Brazilian legal entity to charge a minimum remuneration for the use of an intangible.

According to Brazilian CFC Rules, the profits of directly or indirectly controlled companies and of non-local branches shall be taxed in Brazil on December 31st of the calendar year in which they were accrued (accrual basis). The losses may only be offset against future profits earned by the same (direct or indirectly) controlled company or branch.

As a rule, the profits of foreign (directly or indirectly) controlled companies and of foreign branches are taxed individually. Profit and losses accrued by different foreign (directly or indirectly) controlled companies and foreign branches may be consolidated for Brazilian tax purposes until 2022 (subject to certain requirements).

Profits of foreign affiliate companies may be taxed in Brazil on a cash basis or on an accrual basis, at the taxpayer’s choice. If the requirements are not met, such profits are subject to tax on an accrual basis.

Taxes paid abroad may be offset against the IRPJ and CSLL due by the Brazilian controlling entity, up to the limit of the taxes due in Brazil. Until 2022, a deemed tax credit of 9% may be offset against the IRPJ and CSLL due on the profits of controlled companies that engage in certain operational activities (eg, beverage and food industry, concessions), if certain requirements are met.

Until 2022, IRPJ and CSLL due in Brazil may be paid in instalments proportionally to the profits distributed to the Brazilian controlling entity (with interest), under certain conditions.

For the purposes of Brazilian CFC rules, the Brazilian legal entity may not enjoy certain “tax benefits” provided by law that may reduce the taxation or defer the payment of taxes due in Brazil on the profits of non-local affiliates that comply with certain requirements. 

The foreign company must have active income higher than 80% of its total income in order for the Brazilian legal entity to be able to consolidate the profits and losses for foreign (directly and indirectly) controlled companies, to enjoy a deemed tax credit to be offset against the IRPJ and CSLL due on profits earned overseas and to pay the taxes due in Brazil on such profits in instalments. Active income is defined as the income resulting from economic activities, except that related to royalties, interest, dividends (exceptions apply), equity stake, rent, capital gain (exceptions apply), financial investment and financial mediation. Note that such rules are focused on the nature of income and not on the substance requirements for non-local affiliates. 

Another requirement is that the foreign company may not be subject to a privileged tax regime listed by the Brazilian Federal Revenue Service. Such list includes the Austrian, Danish and Dutch holding companies that do not develop substantial economic activities (defined as companies that do not have the adequate operational capacity for their purposes; such operational capacity shall be evidenced by the existence of employees and facilities at levels compatible with the management and decisions necessary to obtain income, capital gains and distribution of profits). 

Classification as privileged tax regimes also leads to transfer pricing consequences, as Brazilian transfer pricing rules apply to transactions performed with related or unrelated parties that are subject to such regimes.

Capital gains arising from the sale of shares in non-local affiliates are included in the taxable basis of IRPJ and CSLL, due at a combined rate of 34% by the Brazilian legal entity, on December 31st of the year in which there were accrued. According to regulations, losses from such transactions cannot be offset with profits accrued in Brazil. 

The National Tax Code provides for a general anti-avoidance rule, based on which tax authorities would be allowed to question transactions implemented with the sole purpose of avoiding the payment of taxes. However, as this rule was not regulated, its use by tax authorities is questionable.

Regardless of the existence of any other provisions, tax authorities tend to question the validity of transactions that lack “business purpose”, and demand the payment of applicable taxes plus a higher fine of 150% (instead of the general fine of 75%). Administrative tax courts have issued decisions in favour of taxpayers if there is evidence of reasons other than tax efficiency to support the transaction.

Brazilian legal entities must calculate the IRPJ and CSLL and file their corporate income tax returns (ECF) in July of the following year. There is no regular audit cycle. Brazilian tax authorities have five years to question any miscalculation on the part of taxpayers and demand the payment of any taxes paid incorrectly (statute of limitations).

Large taxpayers (currently, those with annual gross revenues higher than BRL200 million (approximately USD50 million) or payroll higher than BRL65 million (approximately USD16 million)) are permanently monitored by Brazilian tax authorities.

As a member of G20, a key partner to the OECD and a member of the Inclusive Framework on BEPS, Brazil had an active role in the BEPS project and has implemented most of the BEPS recommended changes. 

In what refers to minimum standards, Brazil has implemented the Country-by-Country Reporting (CbC) provided by Action Plan 13. Brazil has also signed the Multilateral Competent Authorities Agreement on CbCs. The master and local file obligations as established by Action 13 have yet to be implemented in Brazil, although local transfer pricing information required by the Corporate Income Tax Return in Brazil (ECF) is already very detailed.

In line with Action 14, Brazil has regulated, in its national legislation, the Mutual Agreement Procedure, which was previously only provided for in double tax treaties signed by the country. 

Pursuant to Action 5, Brazil is complying with the exchange of tax rulings, covered by the Convention on Mutual Administrative Assistance in Tax Matters and double tax treaties in force with 33 jurisdictions. Brazil amended its rules on tax rulings to require additional information from taxpayers raising questions on transfer pricing, in a special regime granted to semiconductors (PADIS) and permanent establishments. 

The country has started bilateral negotiations to amend its tax treaties to address treaty-shopping issues, as required by Action 6. The treaty with Argentina has been modified and approved to incorporate limitation-on-benefits (LOB) and anti-avoidance clauses. The DTCs recently signed by Brazil with Singapore and Switzerland also include LOB and anti-avoidance clauses, but they are not in force yet. 

Brazil has expressly stated that it does not intend to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”), as recommended by Action 15, nor to introduce significant changes to its transfer pricing rules, which are significantly different from the OECD guidelines, to reflect the recommendations of Actions 8, 9 and 10.

Prior to BEPS, Brazil had already implemented several measures to prevent base erosion and profit-shifting, such as broad CFC rules and thin-capitalisation rules. Accordingly, Brazil has not demonstrated interest in changing the current rules for the recommendations of Actions 3 and 4.

In 2015, National Congress rejected proposals to change the rules that apply to the distribution of interest on net equity, a way for Brazilian legal entities to remunerate their shareholders calculated on the company’s net worth, which may be classified as a hybrid instrument (Action 2). In the same year, Brazilian Congress also rejected a provisional measure that imposed the mandatory disclosure of tax planning (Action 12). 

Brazil was actively engaged in the BEPS project discussions and has introduced several significant changes to its national legislation in order to incorporate most of the recommendations, as long as they do not affect national guidelines and policies.

In cases where the BEPS recommendations differ significantly from local rules (eg, Brazilian transfer pricing rules), Brazil has not yet moved towards changes. The same may be noticed by the lack of adequacy of Brazilian CFC rules with the recommendations of BEPS in Action 3 (Brazilian CFC rules have a much broader scope).

International taxation has a high public profile in Brazil. Issues regarding the application of double tax treaties, remittances abroad, CFC rules and transfer pricing are often the focus of disputes between Brazilian tax authorities and Brazilian legal entities. There are several units of the Brazilian Federal Revenue Service dedicated specifically to these matters. 

This scenario allows tax authorities in the country to be very specialised in their fields and up to date on current developments, acting fast on certain international developments involving BEPS. 

When compared to other jurisdictions that grant lots of tax incentives, Brazil does not have a competitive tax policy in place. Brazilian tax rules are already focused on ensuring source taxation on remittances made abroad, preventing base erosion and profit-shifting, and implementing measures towards transparency and exchange of information. 

As Brazil does not have a very competitive tax system, it is not expected that BEPS measures will have a significant impact on the Brazilian tax regime.

Brazilian law provides for the payment of interest on net equity (JCP), which is another way for Brazilian legal entities to remunerate their shareholders, and is calculated by applying the Long Term Interest Rate (TJLP) on the Brazilian legal entities’ net worth. JCP is subject to 15% WHT upon payment, and may be deducted from the IRPJ and CSLL taxable basis. 

In view of Action 2 of the recommendations, in 2015 the Brazilian government tried to increase the WHT rate from 15% to 18% and to introduce additional limits to their tax deduction. However, the proposal was not converted into law. 

Brazilian legal entities are subject to the levy of IRPJ and CSLL on their worldwide profits. 

Furthermore, Brazil already imposes several restrictions on the tax deduction of interest paid to a foreign related party or parties that are domiciled in tax havens or subject to privileged tax regimes, either related or unrelated (thin capitalisation rules and transfer pricing rules).

According to Brazilian thin capitalisation rules, interest paid/credited to a related party abroad shall only be tax deductible if the debt does not exceed twice the value of the Brazilian legal entity’s net worth (2:1 debt to equity ratio). If the related party holds an equity stake in the Brazilian legal entity, the debt shall not exceed twice the value of the equity stake held by the related party in the Brazilian legal entity’s net worth. Collective limits also apply if the Brazilian legal entity owes more than one loan. 

If the Brazilian legal entity borrows funds from parties that are domiciled in tax havens or subject to privileged tax regimes, the debt to equity ratio is reduced to 0.3:1.

As per Brazilian transfer pricing rules, loan interest deductibility limits shall be calculated by applying the USD Libor rate for six months' deposits (other rates may apply, depending on the currency of the transaction and whether or not the interest is predetermined) plus a 3.5% spread.

Legal entities are subject to tax on their worldwide profits, and broad CFC rules are already in place. Such rules disregard the international corporate structure, taxing profits accrued by all foreign-controlled entities, irrespective of whether or not the Brazilian legal entity holds a direct equity stake in the foreign company. 

If Brazil were to follow international practice and amend its current CFC rules, taxation would be limited to abusive international structures, and Brazilian legal entities with legitimate international structures would benefit. 

Brazil has not signed the MLI, preferring to negotiate changes to Double Tax Treaties bilaterally. So far, only the Double Tax Treaty signed with Argentina has been modified to incorporate limitation-of-benefits (LOB) and anti-avoidance clauses. The Double Tax treaties recently signed by Brazil with Singapore and Switzerland also include LOB and anti-avoidance clauses, but are not yet in force. 

Such clauses may have an impact on inbound or outbound investments, so it is advisable to revise structures currently in place.

Brazilian transfer pricing rules differ significantly from the OECD guidelines, and the country does not intend to change its rules following the OECD recommendations.

Due to Brazilian transfer pricing reporting and Tax Bookkeeping requirements, there is already transparency with regard to inter-company cross-border transactions in Brazil. In practice, CbC Reports may not provide Brazilian tax authorities with relevant new information for the purposes of applying local transfer pricing rules as Brazilian transfer pricing rules are very different from OECD guidelines, but they may be useful for other purposes of tax inspections, such as to disqualify international tax planning and to question the (lack of) taxation of profits accrued by foreign controlled companies abroad.

The taxation of digital economy business is a very controversial matter in Brazil, mainly considering that taxes are imposed on the federal, state and municipal levels, and these authorities do not have a uniform position. 

From a federal perspective, tax authorities have recently changed their understanding on the levy of WHT on remittances made abroad for the licensing of software, leading to an increase in the tax burden in certain scenarios. Other federal taxes may also be imposed on digital economy transactions. 

State tax authorities also understand that ICMS, which is typically levied on the import of products, should be levied on the sale of downloaded off-the-shelf software to end customers. Municipal tax authorities also understand that ISS should be levied on the licensing or assignment of all types of software. However, according to the Brazilian legislation, transactions cannot be subject to both ISS and ICMS. 

This scenario generates a high level of uncertainty for Brazilian taxpayers or clients of foreign companies located in Brazil (which are also affected by the controversies mentioned above).

As Brazil imposes a high tax burden on almost all remittances abroad (regardless of whether or not they are related to business), Brazilian tax authorities are not focused on significant digital presence and value creation. 

The BEPS process has allowed Brazil to become more aligned with international practices. Before BEPS, the country had a unique view on international transactions, focusing on tax collection. 

It is hoped that, with the regulation of the Mutual Agreement Procedure (MAP) and with the exposure to several other international practices, Brazil may implement other measures the better to align itself with international practices and reduce double taxation situations, creating a better investment ground for Brazilian and foreign investors alike.

Machado Associados

Av. Brig. Faria Lima, 1656 - 11º andar
01451-918 - São Paulo / SP

+55 11 3819 4855

+55 11 3819 5322

machado@machadoassociados.com.br www.machadoassiciados.com.br
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Machado Associados Machado Associados is a highly specialised law firm with a leading international profile, as demonstrated by the many international transactions the firm has conducted since its foundation. The tax department is composed of the consulting and litigation practices formed by four working teams: corporate tax, VAT taxes, litigation and international taxation. The firm's services include: assessment of tax impacts on transactions carried out by companies, and advice on the use of tax credits and compliance with main and ancillary tax liabilities, also regarding their accounting effects; assistance in structuring and restructuring business operations, M&A, joint ventures, asset deals, sales of commercial establishments and corporate reorganisations; assistance for Brazilian companies to expand overseas, by assessing the best legal structure to set up new businesses in other countries, from a corporate, tax, labour and accounting standpoint, and also guiding companies as to the best use of the applicable provisions of the various international double taxation avoidance agreements entered by Brazil; assistance for Brazilian and foreign individuals in all matters related to income tax including preparing and/or reviewing income tax returns; performance of tax-related procedure reviews; advisory for compliance with federal, state and municipal tax-related inspections.

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