Normative Instruction no. 1.474, of June 20, 2014, excluded Switzerland from the list of Jurisdictions with Favoured Tax Treatment (JTF) and included it in certain cases within the concept of privileged tax regime (RFP).

The matter is now governed by Law no. 11.727 which, as well as widening the concept of JTF, also introduced the RFP concept in the legislation relating to transfer prices (by the inclusion of article 24-A in Law no. 9.430).

In accordance with the sole paragraph of article 24-A of Law no. 9.430, an RFP is a regime that meets one or more of the following requirements

i) It does not tax income, or taxes it at a maximum rate lower than 20%;

ii) It grants an advantage of a fiscal nature to a non-resident individual or legal entity without requiring or conditional upon the non-exercise of a substantive economic activity in the country or dependency thereof (item II);

iii) It does not tax income earned outside its territory, or taxes it at a maximum rate lower than 20% (item III);

iv) It does not permit access to information relating to shareholdings, ownership of goods or rights or economic operations effected (item IV).

As from 2010, with the advent of Law no. 12.249 (result of the conversion of Provisional Presidential Decree no. 472/2009), RFPs have become more important because they also affect the rules on minimum capitalization, as well as the rule as to the non-deductibility of expenses and costs incurred, pursuant to article 26 of the same Law.

On June 4, 2010, the Federal Revenue authorities issued Normative Instruction no. 1.037, with a new list of JTFs and creating a list of RFPs. A few days after publication of the said Normative Instruction, Normative Instruction no. 1.045 was issued regulating the possibility for a JTF or person subject to an RFP to apply for a review of the classification of the country or regime. This was the case of Switzerland, which had its classification as a JTF suspended by Executive Declaratory Act no. 11/2010.

On the occasion of the suspension of Switzerland there was a lot of discussion as to the effects of possible regulations that would exclude it or maintain it as a JTF.

On June 20, 2014 Normative Instruction no. 1.474 was published, revoking the inclusion of Switzerland as a JTF, as well as revoking the declaratory act that suspended such inclusion, and effecting with reference to Switzerland the inclusion of regimes that result in the incidence of combined IRPJ lower than 20% as an RFP.

The inclusion of a given regime as an RFP must be considered carefully, in view of the fact that, although there is a tendency to treat this regime as if it were a JTF, it appears that different effects may possibly be applied, principally as regards the increase of the rate of IRRF to 25%.

São Paulo, July 10, 2014.

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.