1 Basic framework
1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?
Brazil has a vast and complex taxation system, comprising federal, state and municipal taxes. The number of taxes and governmental levies is extensive. Although the government and the Congress are attempting to simplify and streamline taxation in Brazil, an extensive body of tax regulations remains in force. The main taxes are as follows:
- Federal taxes:
- income tax (individuals, corporate and withholding);
- social contribution on net profits (CSLL);
- import duties;
- export tax;
- federal excise tax;
- tax on financial transactions;
- rural property tax;
- contribution to the Social Integration Programme (PIS);
- contribution to the Social Investment Fund (COFINS);
- contributions for intervention in the economic domain; and
- certain taxes on labour relations.
- State taxes:
- value added tax on goods and services;
- gift and estate tax; and
- tax on the property of vehicles.
- Municipal taxes:
- service tax;
- real estate property tax;
- real estate transfer tax; and
- municipal fees.
Some of these taxes may be calculated using different methods, depending on the tax regime, the taxpayer or the nature of the triggering transaction.
1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?
The corporate income tax rate for Brazilian legal entities is 15%. A surcharge of 10% is applicable for taxable income exceeding R$240,000 (US$65,000) per year or R$20,000 (US$5,400) per month in case of base periods shorter than one year (the acronym ‘IRPJ' designates both the corporate income tax and its surcharge). CSLL is generally due at a rate of 9%, or 15% for financial institutions and insurers.
Legal entities are also subject to social contributions on gross revenue of any kind, with a few exceptions provided for in the tax legislation (PIS and COFINS). Depending on the system of taxation adopted by the taxpayer, these contributions may be levied at a combined rate of 9.25% or 3.65%.
1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?
The Brazilian tax system is made up of several different taxes, each with its own tax base.
IRPJ and CSLL, for instance, are levied on corporate income and may be calculated under two main systems. The first is the real profits system, whereby IRPJ and CSLL are computed on adjusted net income. The second is the deemed profit system, whereby IRPJ and CSLL are levied on a percentage of gross revenues that varies in accordance with the activities carried out by the legal entity.
Regarding the social contributions on gross revenue, under the non-cumulative system, these contributions are levied at a combined rate of 9.25% and the taxpayer is allowed to register specific tax credits. Under the cumulative system, the contributions are levied at a combined rate of 3.65% without any right to discount credits.
Another example concerns state and municipal value added tax (ICMS and ISS), which are levied on the price of the transaction indicated in the corresponding invoice.
1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?
Not under the real profits system, whereby all kinds of income (eg, gains, financial income) are included in the ordinary taxable income of the legal entity in the relevant period. If the costs and expenses incurred in a specific period exceed the revenue (including the revenue derived from the sale of shares), no income tax will be payable. Exceptions to this rule are dividends received from Brazilian entities, which are exempt from taxation, and income derived from activities carried out in the SUDAM (Superintendency for the Development of the Amazon) and the SUDENE (Superintendency for the Development of the Northeast region) regions.
Under the deemed profit system, legal entities must divide their income into the corresponding categories. Gross revenue derived from business activities is taxed under the so-called ‘presumption percentage', which means that a specific percentage provided by law is applied in order to assess the taxable income. Other income derived from gains, financial transactions and so on must be added to the taxable income, and the IRPJ and CSLL rates are applied to this sum.
1.5 Is the regime a worldwide or territorial regime, or a mixture?
IRPJ and CSLL are levied on a worldwide basis. The profits of branches of Brazilian companies, and of foreign controlled or affiliate companies, are subject to taxation on 31 December of each calendar year, irrespective of distribution. Other income and gains earned directly by a Brazilian company abroad (eg, income or gains derived from financial investments) are also subject to taxation on 31 December.
Taxes paid abroad on profits, income and capital gains can generally be offset against IRPJ and CSLL, up to the limit of the Brazilian tax charged on such profits, income and gains.
The source of the income is generally not relevant in determining the applicable tax, with a few exceptions such as governmental subsidies to encourage the establishment and expansion of economic enterprises and governmental donations, as provided by the law.
1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?
Tax losses may be carried forward indefinitely, provided that the offsetting does not exceed 30% of the taxable profits in any given period. Tax losses may not be carried back. Generally, non-operating tax losses (ie, negative results from the disposal of permanent assets) may only be offset against non-operating profits, subject to the 30% limit.
Tax losses accrued by foreign controlled or affiliate companies cannot be offset against profits accrued in Brazil. However, they can be offset indefinitely against the taxable income of the foreign controlled or affiliate company.
1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?
Except for the purposes of the Brazilian thin capitalisation rules, Brazil has not incorporated the concept of beneficial ownership. Thus, for all tax purposes, the legal owner is deemed to be entitled to an asset and/or income. However, where there is evidence of fraudulent conduct to reduce taxation, the authorities may disregard the formal owner to reach the person that actually incurred a taxable gain.
1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?
According to the equitable taxation principle, whenever possible, taxes are personal and are graduated according to the economic capacity of the taxpayer. The progressive rates applicable to individuals (from 0% to 27.5%) are an example of a mechanism used by law to grade taxation according to the taxpayer's capacity. For legal entities, the law provides for the imposition of an additional 10% of IRPJ on legal entities whose monthly profits exceed R$20,000.
1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?
As a rule, only legal entities are subject to corporate taxation. However, in certain circumstances Brazilian law allows certain individuals and activities to be treated as legal entities for the purposes of corporate taxation. Examples include the following:
- legal entities which perform their activities in Brazil, whether regularly or irregularly incorporated;
- branches, representations, commission merchants and agents appointed by foreign companies, as provided by the law;
- single-person legal entities, as defined by the law;
- cooperatives formed with the sole purpose of purchasing and supplying goods to consumers; and
- silent partnerships (SCPs) (the ostensible partner must calculate the taxable profits of the SCP separately from the taxable results of other business it performs, and tax losses accrued by the SCP cannot be offset against the taxable profits of the ostensible partner).
2 Special regimes
2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
- Free trade zones: In Manaus Industrial Park, the government grants land for a nominal value, with available infrastructure such as water supply and water and sewage treatment, urban transportation and telecommunication facilities;
- Regional development incentives: Enterprises in the Northeast and in certain states in the Midwest and Southeast can benefit from federal, state and municipal benefits;
- Benefits granted for the export of goods and services;
- Special regime for the information technology export platform;
- Special regime for the purchase of capital goods by exporters;
- Incentives for technological innovation;
- Incentives for information technology and automated products;
- Incentives for the development of infrastructure;
- Technological development of semiconductors;
- Modernisation of Brazilian ports;
- Incentives for educational activities;
- Special tax regime for exporting companies;
- Special tax regime for small businesses; and
- Special tax regime for the Brazilian aviation industry.
2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.
Brazilian law does not provide for any relief or tax benefit for corporate reorganisations or intra-group transfers of companies or assets. Any disposition of assets or rights in Brazil, including by virtue of merger or spin-off, is potentially subject to taxation. However, depending on the price attributed to the asset and the corresponding cost basis, the transaction may not trigger any taxation. As an example, where merger transactions are based on the book value of the assets and liabilities, no taxes shall be levied on the merged entity.
2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?
Legal entities with a total annual gross revenue of over R$78 million and legal entities in certain fields of activity must calculate corporate tax (IRPJ) and social contribution on net profits (CSLL) based on the real profits system, and may not opt for the deemed profits system (see question 1.3). These systems differ in the method of calculating taxable profits, as described below.
Under the real profit system, taxable profits shall be based on the legal entity's accounting profits, adjusted by some inclusions and exclusions provided by the law. It shall be calculated from a balance sheet drawn up in December, covering the results for the entire year; but the tax must be pre-paid monthly. Such payments can be reduced or suspended if the legal entity has paid more in taxes on accumulated profits for the period than was actually due, according to the rules for annual calculation.
Under the deemed profit system, the taxable basis is calculated by using a fixed percentage of the gross revenues of the company (8% for the sale of goods; 32% for the provision of services). Specific gains, such as capital and financial gains, must be added to the taxable base.
Under the deemed profits system, legal entities account for revenues, costs and expenses on an accrual basis, but taxes are paid on a cash basis. Under the real profit system, legal entities may choose whether to recognise foreign exchange variations on a cash or accrual basis for tax purposes.
2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?
Brazilian tax law requires legal entities to recognise assets, liabilities, revenues, costs and expenses in Brazilian currency. If a legal entity has adopted another functional currency for corporate purposes, it must prepare, for tax purposes, accounting books based on Brazilian currency. This provision may require the legal entity to convert each item in the financial statement into Brazilian currency based on the exchange rate applicable on the day when the relevant item was accounted for.
2.5 How are intangibles taxed?
Sales of intangibles are subject to capital gains rules, which means that legal entities must pay IRPJ and CSLL on the positive difference between the sale price and the acquisition cost. The acquisition cost usually corresponds to the book value of the intangible, which comprises the price paid for the intangible or the cost incurred to generate the intangible internally, reduced by annual amortisation, if applicable. As mentioned in question 1.4, the gain is included in the ordinary taxable income of the legal entity in the relevant period; if the costs and expenses incurred in that specific period exceed the revenue (including the revenue derived from the sale of shares), no income taxes will be paid.
In the case of business combination transactions that take the form of a share deal, Brazilian accounting and tax regulations require the allocation of the purchase price to identifiable intangible assets of the target, if any. Upon the merger, the portion of the purchase price allocated to intangibles in the financial statements of the acquirer must be allocated to the corresponding intangible item in the financial statements of the surviving entity. Such portion will be subject to amortisation if the corresponding item is also subject to amortisation.
2.6 Are corporate-level deductions available for contributions to pensions?
Yes. Social security contributions paid by a legal entity are deductible for IRPJ and CSLL purposes, including those paid to private pensions.
2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?
Yes. There are two main possible variations, depending on the sector in question: limitations on the choice of taxation, where applicable, and entirely different taxes (contributions and levies) based on the specific industry.
In certain industries, the available choices in how tax is applied may be restricted by special regulations and additional requirements regarding existing taxes. Such special regulations include:
- limits on the choice of income tax method (financial institutions may only choose the actual profits regime);
- limits on the choice of turnover tax crediting system (telecommunication services are subject exclusively to the Social Integration Programme/Social Investment Fund regime); and
- exceptional rules on the application of the various forms of value added tax levied at each level of the federation (eg, specific services are subject to value added tax on goods and services, although they would otherwise fall within the scope of service tax).
Other industries are subject to specific contributions and levies, which may or may not be under the administration of the Federal Revenue Service. Examples include:
- the Fund of Universalization of Telecommunication Service (FUST)/Fund for the Technological Development of Telecommunications (FUNTTEL) contribution, levied on the provision of telecommunication services and applied at a combined 1.5% rate on the gross revenues of the telecommunications services provider; and
- the Contribution for the Development of the National Movie Industry levy, which is due by establishments that broadcast or play audiovisual works subject to IP rights in a public place.
Finally, for certain widely applicable taxes, specific taxable events are provided for by law that in practice take place only in the context of specific industries. For instance, several provisions regarding the tax on financial transactions set specific rates for insurance, loans, international freight and so on.
2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?
Yes – for example:
- the surcharge on value added tax on goods and services, which funds the Poverty Combat Fund; and
- the contributions for intervention in the economic domain (CIDE), which serve as a surcharge on turnover tax in specific circumstances that require emergency funding (eg, FUST/FUNTTEL funds the universalisation of telecommunication services and their technological development; while CIDE – Fossil Fuels funds transport infrastructure development programmes).
There is no corporate net wealth tax in Brazil and there are no taxes on remittances other than any applicable withholding taxes, turnover taxes on imports, service tax on imports of services and the tax on financial transactions on foreign exchange transactions.
2.9 Are there any deemed deductions against corporate tax for equity?
There are no deemed deductions against corporate tax for equity. Equity gains and losses are not subject to taxation at the level of the shareholders.
However, interest is payable on equity to shareholders at pre-determined maximum rates (the long-term interest rate fixed by the National Development Bank) – known as interest on net equity (JCP). JCP is deductible from the IRPJ and CSLL of the paying entity and taxable at the level of the shareholders.
3 Investment in capital assets
3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
Under both the real profit system and the deemed profit system, the taxation of capital assets depends on the accounting value attributed to the capital asset in question and varies depending on whether the company elected or was required to account for such asset at fair value. Gains accrued in the fair value step-up can be deferred to the moment of sale or any other form of change of ownership of the asset, and this deferral can be transferred upon a corporate event under certain circumstances.
Under the real profit system, depreciation expenses are deducted from the taxable base based on their accounting value. Taxpayers under the non-cumulative turnover tax regime may also take input Social Integration Programme (PIS)/Social Investment Fund (COFINS) tax credits over depreciation expenses of capital assets.
Generally, capital gains from the sale of capital assets, regardless of whether such properties are in Brazil or abroad, will be taxed at the general corporate income tax rate, including the deferred tax on the step-up basis, if applicable.
The rules regarding write-offs are set out in the accounting standards. The tax law states whether such losses may be deducted from the taxable base or whether they generate any right to credits. In specific sectors, the tax law allows for the depreciation to be accelerated for tax purposes.
3.2 Are there research and development credits or other tax incentives for investment?
Tax incentives for research and development (R&D) aim to encourage investment in the research of new products and manufacturing processes, and in improvements to the quality, productivity and competitiveness of existing products and manufacturing processes.
Under Law 11,196/05, corporate income tax (IRPJ), withholding income tax (IRRF), social contribution on net profits (CSLL) and federal excise tax (IPI) benefits are granted for such purposes, as well as government subsidies to fund the remuneration of professionals with master's or doctorate degrees hired by Brazilian companies to conduct research activities.
The benefits granted to encourage technological R&D include:
- full depreciation in the year of acquisition of new machinery, equipment and tools used in R&D when calculating IRPJ and CSLL;
- accelerated amortisation of expenses relating to the acquisition of intangibles linked exclusively to technological R&D, by means of the deduction of such expenses as operational expenses in the year in which they are incurred;
- government subvention of up to 60% of the value of the remuneration of researchers holding master's or doctorate degrees;
- a reduction of the IRRF rate to zero for payments or credits to non-residents for the registration and maintenance of trademarks, patents and cultivars abroad; and
- a 50% reduction in the IPI levied on the purchase of equipment, machinery, devices and instruments, spare parts and tools, as long as such products are used for technological R&D.
In late 2018 a new tax incentive programme for R&D in green technologies and greater efficiency in the auto industry, called Route 2030, was introduced to replace Inovar-Auto, which ended in 2017. The tax incentives available for products that benefit from the Route 2030 initiative are wider in scope than those originally available under Inovar-Auto, extending beyond IPI to potential IRPJ and import tax benefits, as follows:
- the possibility to take a 10.2% credit of qualified R&D expenses directly from IRPJ and CSLL due by the company, with the possibility to credit an additional 5.2% of qualified ‘strategic' R&D expenses. The available tax credits are limited by the amount of tax due in each period, with a possibility to carry forward credits for subsequent periods of up to 30% of the tax due;
- an exemption from import tax for automotive parts and components that have no locally produced equivalent, listed in Annex X of Decree 9,557/2018, provided that they are used before the third anniversary of the date of the taxable event; and
- a reduction of up to 2% in the tax on industrialised products for vehicles that comply with the energy efficiency requirements set forth in Annex III, Items 3 to 8 of Decree 9,557/2018 and the structural performance requirements set forth in Annex VIII of that decree.
3.3 Are inventories subject to special tax or valuation rules?
Inventories should be booked and valued at cost and may be subject to the following taxes:
- IPI on the sale of imported fixed assets, if such assets are sold less than five years after the relevant import. IPI may also be triggered on the sale of inventory items. IPI rates vary depending on the tax classification of the relevant items. IPI is a value added tax, but the buyer should only take IPI tax credits in the case of items that would be subject to a subsequent taxable sale (mainly items imported for resale or used in the production of goods for resale);
- value added tax on goods and services (ICMS), generally at a rate of 18%, 12% or 7%, on the sale of inventories (in some states, ICMS may also be charged on the sale of fixed assets). ICMS is also a value added tax and the buyer may be entitled to ICMS tax credits; and
- IRPJ and CSLL (34%) on that part of the sales price which exceeds the book value of the relevant fixed asset or the cost of the relevant inventory item.
3.4 Are derivatives subject to any specific tax rules?
No. Derivatives are taxed in the same way as other financial instruments. In the main, financial transactions involving derivatives – such as swaps, options and hedges – are subject to IRPJ, CSLL, PIS and COFINS and IOF. Financial entities are subject to different rules regarding PIS and COFINS on derivative transactions.
4 Cross-border treatment
4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?
Generally, non-resident entities are subject to withholding income tax (IRRF) only on income received from Brazilian sources relating to services, rights and capital gains on the sale of Brazilian assets. The applicable rates in the absence of a double tax treaty are:
- 25% for any payments or credits of income to beneficiaries in tax havens; and
- in the case of other beneficiaries:
- 25% for the provision of services;
- 15% for other sources of income; and
- progressive rates from 15% to 22.5% for capital gains.
Dividends paid or credited to non-resident entities are not taxed.
Brazilian domestic law does not address the characterisation of permanent establishments of non-residents in Brazil. The taxation of any such establishments in Brazil must be analysed on a case-by-case basis in light of the rules governing entities subject to IRPJ, the taxation of branches, representations, commission merchants and agents of foreign companies, and the provisions of any relevant double tax treaty.
4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?
Payments to individuals or companies domiciled abroad for services rendered are generally subject to a 25% withholding income tax. Other payments (eg, interest, technical services or royalties) are subject to a 15% rate.
Payments made to beneficiaries that are resident or domiciled in countries which do not tax income or which tax income at a maximum rate of less than 20% are generally subject to a 25% withholding income tax. In certain cases (eg, export financing), the withholding income tax is reduced to zero.
Capital gains are taxed at progressive rates from 15% for gains under R$5 million to 22.5% for gains over R$30 million on the difference between the sales price and cost of acquisition of the asset sold.
Income and capital gains from financial transactions by non-residents are taxed in the same way as financial transactions of residents (individuals), except that foreign institutional investors can only invest in the Brazilian stock markets through a special system (Resolution 2689 of the Central Bank), which exempts capital gains on the sale of stock from tax.
Although they do not qualify as withholding taxes, since they are levied on Brazilian resident companies that remit the resources in question, and not on the non-resident beneficiary, several other taxes apply to this remittance, as follows:
- a services tax (ISS) levy of up to 5% of the value of the remittance if it is made in consideration for the import of services into Brazil (tax may be grossed up if the remittance is net of taxes);
- a PIS/COFINS – Imports levy of 9.25% on the gross amount of the remittance, including the value of the tax itself and that of the ISS, in the case of import of services; and
- contribution on intervention in the Brazilian economic domain (CIDE) at a rate of 10% in the case of royalties and technical services.
The general rules on withholding taxes are set out in Table 1.
Table 1. Withholding tax rules
|Withholding income tax||CIDE royalties||PIS/COFINS||ISS|
|Transfer of technology||15%||10%||Not applicable but subject to dispute||5% in São Paulo, applicable only to trademarks and advertising signs|
|Management/ technical services||15%||10%||9.25%||5% in São Paulo|
|Copyrights paid to authors||15%||10%
11% for audiovisual works
|-||5% in São Paulo, applicable only to advertising signs|
|Copyrights paid not to author (royalties)||15%||10%
11% for audiovisual works
|-||5% in São Paulo, applicable only to advertising signs|
|Interest on net equity||15%||-||-||-|
4.3 Do double or multilateral tax treaties override domestic tax treatments?
Yes. The provisions of double tax treaties executed by Brazil shall prevail over domestic legislation regarding the taxation of income covered by such treaties.
4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?
Yes. Any withholding tax paid abroad on a certain item of income may be credited up to the full amount of the corresponding corporate income tax due in Brazil on that income. Only the amount of the tax effectively paid abroad is admissible as a foreign tax credit, disregarding any tax benefits or discounts allowed by local law in the source state.
Brazilian taxpayers that avail of foreign tax credits must obtain and present the corresponding supporting documents to the Federal Revenue Service by 1 January of the year after the offset takes place. These supporting documents, in the case of withholding tax, are:
- the payment slips and proof of withholding issued by the source country; and
- validation of these documents by the treasury of the corresponding Brazilian embassy in the country of source or, alternatively, either of the following documents:
- an apostille issued by the local Brazilian embassy in the source country and an official translation into Portuguese of the payment slips and proof of withholding; or
- books that prove that the item of income in question was accrued, and documents that prove that the laws of the source country require that the local entity withhold the withholding tax in question (ie, proof that the tax is effectively due).
4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?
Although the redomiciliation of a foreign entity to Brazil is not prohibited, this is not a common procedure. The most common entry structures for inbound corporate entities are corporate or asset acquisitions. Under these structures, the target assets or interest may be valued at fair market value without any tax implications in Brazil; but tax may be due in the country where the assets are located or where the holder of the target interest is located.
4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?
There is no formal exit tax under Brazilian law or regulations. However, in practice, any capital gains on disposed-of Brazilian assets will be taxable at the moment of disposition, regardless of the nationality of the taxpayer.
5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
As is widely recognised, specific anti-avoidance rules (SAARs) are the primary tools used by countries to counter tax avoidance. In this sense, several SAARs apply to corporate taxpayers under the Brazilian legislation (see question 5.3).
Brazil does not have a statutory general anti-avoidance rule (GAAR). That said, the limits of tax planning are the subject of intense debate, and the Brazilian tax authorities and administrative courts have been applying concepts such as abuse of law, substance over form, economic reality and business purpose to disregard transactions without an express statutory provision for several years.
5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?
Despite the lack of a GAAR in force (there is a general rule that allows the tax authorities to disregard acts undertaken for the purpose of concealing the occurrence of a taxable event, which has never been regulated), in recent years the tax authorities and the Administrative Council of Tax Appeals – the administrative body that hears tax disputes – have been disregarding transactions based on fraud, sham, abuse of law, abuse of rights, lack of business purpose, lack of economic substance and other Brazilian or foreign doctrines.
Accordingly, it has been argued in some administrative decisions that the existence of a real business purpose is an essential condition for the validity of a structure adopted by the taxpayer. Hence, it is necessary to verify whether a transaction was undertaken for the sole purpose of obtaining a tax advantage, with no other relevant purpose other than reducing the tax burden. In practice, the analysis by the administrative courts is undertaken on a case-by-case basis. This discussion has resulted in many tax assessments, several of which have involved very large amounts.
At the level of the judicial courts, there are few precedents on the limits of tax planning and they tend to be more favourable towards taxpayers in the sense that the tax authorities cannot disregard transactions put in place by taxpayers based on mere indication of fraud.
5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
Brazilian corporate entities are subject to several SAARs, which include the controlled foreign company (CFC), transfer pricing and thin capitalisation rules, limitations on the deductibility of royalties and limitations on the deductibility of losses. The most relevant rules are outlined below.
Controlled foreign companies: Pursuant to the current CFC rules, taxation is imposed at the level of the Brazilian controlling company on profits accrued by each direct or indirect foreign subsidiary on 31 December of each calendar year, on an accrual basis and regardless of any distribution. Foreign tax credits are available against IRPJ.
Transfer pricing rules: The transfer pricing rules have applied since 1997, when Law 9,430/96 came into force. The system allows for the determination of the maximum amounts of deductible expenses and the minimum amounts of taxable revenues for Brazilian entities engaged in transactions with related parties established outside Brazil or in cross-border transactions with parties domiciled in low-tax jurisdictions or entities subject to privileged tax regimes.
Although inspired by the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, the Brazilian rules do not provide for a functional analysis, but rather provide for the calculation of the benchmarks through the application of objective methods provided for by law.
Thin capitalisation rules: Brazilian law also includes thin capitalisation rules, which establish limitations on the deductibility of accrued interest based on debt-to-equity ratios in case of loans executed with related parties and parties under a privileged tax regime or domiciled in low-tax jurisdictions.
In general terms, a 2:1 debt-to-equity ratio applies to transactions where the related party creditor, individual or legal entity resides in a jurisdiction subject to regular taxation. A 0.3:1 debt-to-equity ratio applies where the creditor is domiciled in a low-tax jurisdiction or is subject to a privileged tax regime. If any excess is verified regarding the limits set forth in the legislation, the excess interest will be considered a non-deductible expense in calculating IRPJ.
Restrictions on deductibility of royalties: Brazilian law imposes limitations on the deductibility of royalties which vary, depending on the industry involved, to a maximum of 5% calculated on the net sales of the products manufactured or services rendered under an agreement, including payments for the transfer of technology, the rendering of technical assistance and the licensing of patents and trademarks.
The 1% to 5% deduction limitation rules have been subject to debate, particularly as regards payments between companies in Brazil and cases where several items of intellectual property are licensed in a single agreement. In such cases the tax authorities may seek to restrict the deduction of several licensed rights up to a global limit of 1%, instead of applying the 1% limit to each item and the 5% globally.
Restrictions on deductibility of payments abroad to low-tax jurisdictions and privileged tax regimes: In addition to the transfer pricing and thin capitalisation rules, Article 26 of Law 12,249/10 states that amounts paid, credited, delivered, employed or remitted under any title (except for interest on equity), either directly or indirectly, to individuals or legal entities domiciled in low-tax jurisdictions or that are subject to privileged tax regimes will not be deductible for IRPJ purposes, unless the following facts are cumulatively evidenced:
- the identity of the effective beneficiary of the payment overseas;
- the operational capacity of the non-resident individual or legal entity performing the transaction; and
- the payment of the respective price and receipt of the goods or services, or use of the right transacted.
Disguised distribution of profits: Domestic transactions between related parties are subject to disguised distribution of profits rules, which require assets and transactions to be valued at a level that is not excessively below market value. If the transaction is conducted for a value that is excessively below market value, the difference between the value attributed to the assets or transaction and the actual market value is imputed as a taxable gain to the seller. If the assets or transaction is overvalued, the excess will not be deductible for the buyer.
Market value is calculated based on prior recent negotiations involving the same asset, or recent negotiations involving similar assets, between parties that are not compelled to transact, or that benefit from the knowledge of circumstances that may influence the price determination. If such criteria cannot be used, the market value may be calculated based on expert appraisal.
Limitation on deductibility of losses: According to Brazilian law, net operating losses (NOLs) generated in a given period can be offset against taxable income for the following period, up to a cap of 30% of taxable income (ie, for each R$1.00 of income, R$0.70 must be subject to taxation, regardless of the amount of NOLs). Tax losses may be carried forward indefinitely.
5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
Taxpayers have the right to request a ruling from the tax authorities on the interpretation of the tax law, as applicable to any specific facts, under Article 46 of Federal Decree 70,235/72, which regulates administrative tax proceedings.
This tax ruling will remain effective until either the law changes or the taxpayer is notified that the ruling has been revoked due to a change in interpretation of the law. The tax authorities do not need court authorisation to revoke a ruling.
Specific rules apply regarding such administrative proceedings at the federal, state and municipal levels. Generally, however, a request cannot be filed if any tax procedure to investigate the subject of the request is pending or if its effects will be void if filed under such circumstances.
5.5 Is there a transfer pricing regime?
The transfer pricing rules are designed to prevent Brazilian legal entities from avoiding tax by underpaying or overpaying related parties, parties domiciled in low tax jurisdictions or entities subject to a privileged tax regime.
The Brazilian transfer pricing rules apply to:
- expenses incurred through the acquisition or import of assets, goods, services or rights;
- revenues deriving from the export of goods, services or rights; and
- interest expenses and revenues.
They do not apply to domestic transactions or to royalties paid in consideration for the transfer of technology, which are subject to specific rules.
Brazilian law provides for specific methods with pre-determined profit margins. Taxpayers may choose the method which best suits their particular case and leads to the lowest tax adjustment, except in the case of commodities, for which a specific method must be used. The chosen method must be used consistently for each type of asset, good, right or service. Only the methods expressly provided for by law are allowed. No other method can be used, even if based on arm's-length principles or the OECD Transfer Pricing Guidelines.
The Brazilian transfer pricing rules provide for four methods to determine the maximum deductible expenses, costs and charges related to goods and services or rights imported from a related party, as follows:
- comparable independent price;
- resale price less profits;
- production cost plus profits; or
- imported quoted price.
If the benchmark reached by the application of one of these methods is greater than the import prices that are subject to transfer pricing control, then no adjustment is required when calculating IRPJ and CSLL. If the benchmark is lower than the import prices and this difference exceeds the variations deemed acceptable under law, such difference must be added to the IRPJ and CSLL tax base.
Brazilian taxpayers that export to related parties are subject to the transfer pricing rules if the average sales price is lower than 90% of the average sales price charged to unrelated parties in the Brazilian market during the same period and under similar payment conditions. If the average price with related parties is lower than 90% of that charged in the Brazilian market, the taxpayer is subject to one of the following methods:
- export sales price;
- wholesale price in country of destination less profit;
- retail price in country of destination less profit;
- acquisition or production cost plus taxes; and
- exported quoted price.
If the benchmark obtained through one of these methods is lower than the actual export prices that are subject to transfer pricing controls, no adjustment shall be made to the IRPJ and CSLL tax base. If the benchmark is higher than the export prices and this difference exceeds the variations deemed acceptable under law, such difference must be added to the IRPJ and CSLL tax base.
5.6 Are there statutory limitation periods?
The tax authorities may generally audit taxpayers up to five years after the end of the fiscal year in which the taxable event occurred. There is some debate regarding when this five-year period begins to run, depending on the type of tax considered and the situation. In general, this term also applies to tax refunds and amendments of tax returns, although certain specific taxes and labour obligations have a longer statute of limitations.
6.1 What are the deadlines for filing company tax returns and paying the relevant tax?
Taxpayers in Brazil must annually file an income tax return in relation to each fiscal year (1 January to 31 December). The deadline for submission of the income tax return is usually the last business day of July the following year. Corporate income taxes are usually due on annual adjusted profit, with monthly pre-payments.
Other tax returns at the federal, state and municipal levels are also due; the corresponding deadlines will depend on the respective legislation.
Most tax returns are submitted online and data reported can be easily cross-checked with data provided in other statements (including those required from financial institutions).
6.2 What penalties exist for non-compliance, at corporate and executive level?
The penalties for non-compliance with tax obligations are set out in federal, state and municipal legislation. The standard penalty for late collection of federal taxes, including corporate income taxes, is 0.33% per day, with a cap of 20% for late payments. Delayed payments are also subject to interest calculated according to a federal basic interest rate.
If an audit reveals non-payment of tax, the standard applicable penalty is 75% of the amount of tax amount due. In case of verification and evidence of evasion, fraud or wilful misconduct, this fine is increased to 150% of the amount of tax allegedly due and payable, as determined by the tax authorities.
This penalty can be increased by 50% if, during an audit, the taxpayer does not timely respond to the auditor's demands for clarifications or requests for certain documents. In such cases, the penalty may thus total 112.5% or 225% of the amount of tax due, depending on whether evasion, fraud or misconduct is also established.
The tax authorities may also apply penalties for non-compliance with tax reporting obligations, even if all taxes have been fully paid. The penalty for untimely filing of most federal tax returns is R$1,500 for each month of delay. In case of omitted, incomplete or inaccurate information in tax returns, taxpayers are subject to a 3% penalty on the value of the irregular commercial or financial transaction.
Although tax liability is, in principle, limited to the legal entity itself, managers and quota holders or shareholders may be held jointly liable for a company's tax liabilities in the event of its irregular dissolution, actions that exceed the scope of their authority or actions that are contrary to the law or company bylaws. In practice, in cases involving allegations of evasion, fraud or misconduct, the tax authorities commonly order tax assessments of both the legal entity and its managers and quota holders or shareholders for the purposes of determining applicable taxes and penalties.
6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?
As part of the G20 and the Global Forum on Transparency and Exchange of Information, Brazil has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as well as the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Both agreements are currently in force.
These instruments provide for administrative cooperation in order to combat tax avoidance and evasion related to transactions carried out from 1 January 2017. In this sense, Brazil has incorporated into its domestic legislation the following forms of automatic exchange of information:
- the Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters;
- country-by-country reporting; and
- exchange on tax rulings.
In addition, Brazil has several signed several double tax treaties with other jurisdictions, which include specific exchange of information provisions.
7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?
Tax consolidation is not generally permitted by Brazilian accounting rules or tax rules, which generally require the submission of individual statements, except in some specific limited situations.
Investments in controlled or affiliated entities must be evaluated using the equity method. Under this method, the book value of the investments is accrued to the investor, to reflect the value of its interest in the total equity of the subsidiaries.
Under the Brazilian controlled foreign corporation (CFC) rules, until 2022, a parent company may consolidate positive and negative results of foreign controlled or affiliated companies (proportionate to its share in those companies) in its books, unless the circumstances for mandatory application of the CFC rules to affiliated foreign companies are met or the foreign entity does not generate at least 80% active income. Profits earned overseas by foreign branches and foreign controlled or affiliate companies (as legally defined) shall be considered individually for tax purposes. Tax consolidation of results is allowed only for branches based in the same country. Losses accrued abroad cannot be offset against profits accrued in Brazil.
8 Indirect taxes
8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?
Brazilian indirect taxes are levied at different federative levels. At the federal level, a corporate taxpayer may be subject to:
- contribution to the Social Integration Programme (PIS);
- contribution to the Social Investment Fund (COFINS);
- import tax;
- export tax; and
- federal excise tax (IPI).
At the state level, the taxpayer may be subject to value added tax on goods and services.
At the municipal level, the taxpayer may be subject to service tax.
8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?
In case of a direct share acquisition, none of the Brazilian transactional taxes apply (eg, ICMS, IPI, PIS/COFINS, real estate transfer tax). However, the acquisition of shares may trigger income tax on any capital gain at a combined rate of 34%. If the capital gain is registered by an individual resident in Brazil or a foreigner, the tax rate will range from 15% to 22.5%.
Due to this difference in tax rates, sellers commonly reorganise the corporate structure of the target pre-closing, to ensure that individuals are the entities selling the shares, rather than a holding company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.