On the 24th of October 2016, Brazilian tax authorities have issued a ruling (ADI/RFB 7/2016) determining the levy of Withholding Income Tax (WHT) and Contribution of Intervention on the Public Domain (CIDE), at respective rates of 15% and 10%, upon the payment into share capital of Brazilian companies with intangibles, such as technology (know-how), software and trademark, when made by non-residents.
Important to note that this ruling consists of a change on the authorities' past understating, which used to consider these types of capitalization as exempt from any sort of taxation.
Thus, this sudden alteration of interpretation by the tax authorities reflects the volatility of the Brazilian tax legislation and could cause a negative impact on the inflow of technology into the country and also of foreign investment in general terms, which, on the contrary, should be deeply incentivized, for obvious reasons.
Additionally, in our opinion, this taxation lacks legal grounds, once the Brazilian tax legislation determines the levy of WHT and CIDE only upon the remuneration and acquisition of foreign technology, but never upon capitalizations, which is a reason why, if the taxpayer wants to avoid risks of challenge, we strongly encourage a preventive discussion before Judicial courts, with solid chances of success, so that the technology could be paid up into the local company's share capital without any taxation."
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.
