Taxation in Brazil and
Business Set Up
Jérôme van Staden
International Tax Partner
September 2015
Agenda
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Tax system at a glance
Tax system – challenges
Hot tax topic in Brazil
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Electronic Files
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SPED - Public System of Digital Bookkeeping
Investing in Brazil
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Funding alternatives
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Comparison of cash repatriation alternatives
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Holding Structure
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Cross border service remittances
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Recent developments
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Tax system at a glance
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Taxes imposed at the Federal (e.g: IRPJ, CSLL, CIDE, WHT, PIS, COFINS, IOF, II,
IPI), State (e.g: ICMS) and Municipal (e.g: ISS, Real Estate Transfer Tax) levels.
Corporate income tax (IRPJ) and Social contribution tax on profits (CSLL)
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Gross revenue social contributions (PIS and COFINS)
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Combined rate of 34%.
Tax losses carryforward .
Offsetting is limited to max. 30% of annual net taxable income.
Turnover taxes charged on gross receipts.
As a general rule, combined rate of 3.65% (cumulative) or 9.25% (non-cumulative regime).
Social contributions on Import (PIS and COFINS importação)
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Excise tax / Federal VAT (IPI)
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Imposed on the import of goods and services.
Combined rate of 9.25% for services and 11.75% for goods (general rule).
Charged on imports of goods, on the first sale of imported goods and on local transactions
involving manufactured goods.
In principle, non-cumulative tax. The tax rate varies depending on the product traded and
ranges from 0% to 365%.
Tax system at a glance
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State VAT (ICMS)
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Service Tax (ISS)
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Levied on the cross border remittance of technical services, technical assistance and royalties.
10% tax rate.
Financial and Exchange Operations Tax (IOF)
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Levied on the rendering of listed services.
Cumulative municipal tax, rates varies from 2% to 5% depending on the municipality.
Special Contribution (CIDE)
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Levied on physical or legal circulation or movement of goods, including at the moment of
custom clearance and on certain services (i.e., telecommunication and certain transportation
services).
Non-cumulative tax, rates varies from 4% to 19% depending on the good, on the State (region)
and type of transaction (e.g. interstate, intrastate, importation, interstate resale of imported
goods, etc.).
Federal tax levied on currency exchange conversion, loan, securities trading and insurance
transactions.
Rates varies from 0% to 25%.
Import duty (II)
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Levied when products are imported into the country.
Rates can vary from 0% to 35%. Non-recoverable.
Tax system – challenges
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Brazilian tax system complexity and frequent changes requires constant monitoring of
both amendment in tax law and new interpretation of existing law.
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Excessive tax compliance and bureaucracy.
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The tax authorities take what may be viewed as unreasonable positions with some
frequency, so administrative and/or judicial litigation are common.
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Use of a substance over form approach is a trend in the administrative jurisprudence in
Brazil.
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Electronic files are mandatory in several situations and some new electronic filings are
under implementation. They allow massive data cross-checking.
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Hot tax topic in Brazil
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SPED - Public system of digital bookkeeping
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Implemention in phases since 2008.
Represents an integrated initiative by the federal, state and municipal tax authorities.
Tax, commercial and operational data are informed by taxpayers to tax authorities
electronically, in standard formats, aiming at (among others):
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Integrating the different levels of taxation (federal, state and municipal) by
standardizing and sharing accounting and tax information;
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Allowing broader data cross-checking for tax purposes, working toward greater
efficiency in detecting irregularities;
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Speeding up and improving tax inspection processes;
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Rationalizing, standardizing and consolidating the accessory obligations required of
taxpayers.
Started with: Digital Accounting Bookkeeping (Escrituração Contábil Digital), Digital Tax
Bookkeeping (Escrituração Fiscal Digital) and Digital Invoice (NF-e), D i g i t a l Tax
Bookkeeping (EFD-Contribuições).
September 2015: Digital Accounting and Tax Bookkeeping (Escrituração Contabil Fiscal) –
transactions that affect the CIT and SCT computation.
January 2016: Bloco K - the electronic version of the Book for the control over production
and inventory (Livro de Controle de Produção e Estoques).
October 2016 (tests March 2016): e-Social (“Digital payroll”) - labor, social security, tax and
fiscal information of employees.
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SPED - Public system of digital bookkeeping
Multi disciplinary
Changing of internal
process
Organization Culture
Change
Characteristics
Management - Direct
Involvement
Information Tecnology (IT)
Reporting of confidential
info
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Reponsability- Clear
Definition
Challenging environment also comes with opportunities:
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Review and improve internal process and controls, improve consistency/quality of the data.
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Investing in Brazil
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Funding Alternatives
Debt
Equity
ForCo
Overseas
ForCo
Capital
Brazil
Payment of
dividends and/or INE
Overseas
Loan
Brazil
BraCo
Payment of
interests
BraCo
Potential Benefit:
Potential Benefit:
Cash may be repatriated through the payment of dividends (0%
WHT) and/or INE (generally taxed at 15% - or 25% if paid to a tax
haven jurisdiction - but deductible at 34%)
Repatriation of funds even if there is a lack of basis to
distribute dividends or interest on net equity
Interest payments generally taxed at 15% - or 25% if paid to a
tax haven jurisdiction - but deductible at 34% (provided
conditions are met)
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Comparison of cash repatriation alternatives
Interest on net equity
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INE is a statutory mechanism to
remunerate shareholders.
INE calculation is based on the Federal
long-term interest rate (TJLP, currently
6.5%) over the net equity of the
Brazilian company.
Dividends
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Dividends may be paid out of
accumulated earnings, profits and
unrestricted reserves.
Prior registration with Brazilian Central
Bank is required to enable future
repatriation of funds and remittance of
dividends in foreign currency.
Loans
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Deductible for CIT purposes (34%) up
to the greater of (i) 50% of current
earnings; or (ii) 50% of accumulated
earnings.
Subject to 25% WHT on payments to
Singapore (15% WHT general rate for
“regular” jurisdictions).
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Dividend payments, although not
deductible, are exempt from
withholding tax (out of profits
generated on or after January 1,
1996).
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INE remittances are currently IOF zero
rated.
In some jurisdictions, INE may be
treated as dividend payment qualifying
for participation exemption regime.
Further analysis on the tax treatment of
INE at the recipient level is required .
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Dividends remittances are currently
IOF zero rated.
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Loans allow for the payment of interest and
principal to the note holder.
Prior registration with Brazilian Central Bank
is required to enable payments of the loan
and the remittance of interest outside of
Brazil.
Interests are deductible (at 34%) for CIT
purposes provided that:
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Thin cap rules are observed
(debt/equity ratio 0.3:1 - lender in
Singapore; 2:1 “regular” jurisdictions),
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Rates comply with transfer pricing rules
(index rate +3,5%), and
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The loan is considered necessary for
the Brazilian company’s activities.
Interest paid to Singapore is subject to 25%
WHT (15% regular rate – no treaty benefit) .
IOF is zero rated on the inflow of funds to
Brazil related to loans with a maturity longer
than 180 days (otherwise 6% IOF would
apply).
Loans are subject to foreign exchange
fluctuations (FX).
Holding Structure
Items to be considered
Holding
Company ?
99,9%
Brazil
subsidiary
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Capital Gain
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New investment/Acquisition of existing
company
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Dividend?
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Royalty, services
► Tax rates
► Deductibility rules
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Interests
► Tax rates
► Thin capitalization rules
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Tax Treaty to avoid Double Taxation
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Business purpose
Holding Structure
Cross border remittances
China
Non Treaty
Japan
Netherlands
Tax haven (a)
Privileged
Tax Regime
(b)
Dividend
Tax free
Tax free
Tax free
Tax free
Tax free
Tax free
Interest
15%
15%
12.5% (c)
15% (c)
25%
15%
Royalty
15%
15%
12.5% (c)
15% (c)
25%
15%
15% WHT
in Brazil
15% WHT
in Brazil
Not taxable
in Brazil
15% WHT
in Brazil
25% WHT
in Brazil
15% WHT
in Brazil
Thin Cap
2:1
2:1
2:1
2:1
0,3:1
0,3:1
Additional
Requirements
for deductibility
No
No
No
No
Yes (e)
Yes (e)
Capital gains (d)
(a) Applicable to all jurisdictions considered as tax haven from a Brazilian perspective (e.g. Singapore, Hong Kong).
(b) Applicable to all regimes considered privileged tax regimes (e.g. US: if entity was incorporated as a state Limited Liability Company (LLC) formed by
nonresident shareholders and not subject to federal income taxation).
(c) Matching credit may be available.
(d) On the sale of shares of Brazilian companies.
(e) Payer is requested to identify the real beneficiary of the entity, present additional documentation and prove the operational capacity of the entity (not
applicable to Interest on Net Equity).
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Recent Developments
Black List and Grey List
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Ordinance no. 488 (November 2014): reduced the threshold at which countries are defined as having
favorable taxation (tax haven jurisdictions) or a privileged tax regime from 20% to 17%.
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Currently, 64 countries are on the black list (tax havens) – including Singapore - and eight “regimes” are
described in the grey list (privileged tax regimes).
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The lists have not yet been updated yet (exclusion is not automatic).
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Requirement: country or regime must be aligned with the “international standards of fiscal transparency”.
Charter, leases and rental of Vessels
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0% WHT cross-border vessel charter payments provided the payments are not to a tax haven.
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“Split contract” structures: common structure under which a Brazilian company enters into a vessel charter
agreement with a foreign resident and a service agreement with a local resident for services related to the
operation of the vessel.
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New Legislation (in force since Jan 2015): restrictions apply on the simultaneous execution among related
parties of a vessel charter agreement and a services agreement, related to the prospection and exploration
of oil and natural gas.
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In that case, the value of the charter contract may not exceed the following percentages of the total
contract value:
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85%, when the charter relates to floating productions systems
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80%, when the charter relates to drilling ships or
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65%, when the charter relates to other types of vessels
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Excess: 15% WHT (beneficiary is located in a low-tax jurisdiction or a privileged tax regime – 25%).
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Questions
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