On September 13, 2016 the Brazilian Federal Revenue Office (Secretaria da Receita Federal – SRF) issued Normative Instruction RFB No. 1658 (IN 1658/2016), which amends Normative Instruction RFB No. 1037, of June 4, 2010 that list the countries or dependencies with low taxation and privileged fiscal regime. There are more than 60 jurisdictions in this list.
Favored taxation country or dependency1 means any country or dependency of a country that does not impose tax on income or, when imposes, it is a low-tax country, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum).
Privileged fiscal regime2 means any jurisdiction that met one or more of the following requirements: (i) it does not tax income or where the maximum applicable tax income rate is below 20%; (ii) it grants fiscal advantages to a non-resident individual or legal entity: (a) without requiring that substantial economic activity be made in the country or dependency; or (b) conditioned to the non-exercise of substantial economic activity in the country or dependency; (iii) it does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20% to such earnings; (iv) it does not permit access to information regarding the capital stock structure, ownership of assets or rights or to the economic transaction entered into between the parties.
IN 1658/2016 replaces the Netherlands Antilles by Curacao and St. Maarten for succession issues, excludes St. Kitts and Nevis by duplicity with the Federation of Saint Kitts and Nevis and adds Austria (if the Austrian legal entity is included in the holding company regime) and Ireland. Therefore, special attention should be given to Brazilian companies with operations in Austria and Ireland.
To be included within the privileged tax regime, it is understood that the legal entity that carries out the activity of holding company plays substantive economic activity when it has, in its country of domicile, operational capacity suitable for its purposes, evidenced, among other factors, by the existence of a sufficient number of qualified employees and facilities appropriate to the exercise of effective decision-making and management related to: (i) the development of activities in order to obtain income derived from its assets; or (ii) the administration of equity interests in order to obtain income arising from the distribution of profit and capital gain.
The term "substantive economic activity" is essential to distinguish between productive investments that generate employment and income in the country, and abusive tax planning, which causes loss of revenues for Brazil. This concept affects Brazilian companies with Austrian holding companies.
IN 1658/2016 was published in the Official Gazette of the Union (Diário Oficial da União – DOU) on September 4, 2016 but will produce legal effects as of October 1, 2016.
The major novelty of this measure is the inclusion of Ireland, which will adversely affect different sectors of the Brazilian economy that are more internationalized, like information technology and agribusiness. The Brazilian air industry will be particularly compromised. This decision increases to 25%3 the rate of tax paid by the airlines about the value of the leasing of their fleet. According to the Brazilian Association of Airlines (Associação Brasileira das Empresas Aéreas - Abear), the inclusion of Ireland will affect the levying of taxes on half of the fleet of aircraft of Brazil, rising to BRL 1 billion of taxes on the system, because approximately to 300 aircraft (55% to 60% of the fleet) are leased from Ireland.
The Brazilian tax authorities are in line with other countries that have imposed restrictions on tax havens and recently passed the challenge especially the Irish tax regime.
1. This first definition is contained in article 24 of Law 9.430, of December 27, 1996, which introduced transfer pricing regulations in Brazil.
2. This second definition is provided for in article 23 of Law No. 11.727, of June 23, 2008, which approved new wording for articles 24-A and 24-B of Law 9.430/96. Article 30 of Law 11.941/2009, clarified that it is not necessary to attend simultaneously and cumulatively all the requirements listed above and that it is sufficient to attend only one for a country or dependency to be treated as a privileged fiscal regime.
3. The rate to be paid on the value of the lease of the aircraft, according to the new rule, would rise from zero (it is 15% but the airlines are exempt) to 15%. Taking into account other embedded costs, the real impact would be 33%.
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