Brazil: Tax Structuring Opportunities Created: Luxembourg Removed From Grey List

Last Updated: 27 October 2011
Article by Ricardo Ciconelo and Daniel Takaki

In December 2010, following a multinational effort to limit tax havens, Luxembourg terminated the existence of its famous 1929 holding company structure. Three months later, in March 2011, Brazil removed Luxembourg from its list of privileged tax regimes. The removal of Luxembourg from this list creates new tax structuring opportunities that multinational corporations may wish to consider.

Brazil's list of privileged tax regimes, known as the 'Grey List', aims to penalise jurisdictions that grant undesirable preferential tax treatment by subjecting them to restrictions. 'Privileged tax regimes' are defined as regimes which:

  • do not tax income, or tax income at a maximum rate " lower than 20%;
  • grant tax incentives to non-residents without requiring any performance of economic business activity within the jurisdiction; or
  • have laws that prevent access to information regarding corporate structures or the ownership thereof.

In an attempt to counterbalance the undesirable incentives created by privileged tax regimes, Brazil increases the cost of cross-border payments made to jurisdictions with such preferential tax regimes. In general, interest payments and capital gains paid by Brazilian entities to foreign jurisdictions carry an income tax withholding rate of 15%. However, in an attempt to counterbalance the preferential tax treatments provided by tax havens, when such payments are made to jurisdictions with preferential tax regimes, Brazil increases the income tax withholding rate to 25%.1

Although Luxembourg's removal from the list was a result of the termination of the vehicle which granted the favourable tax treatment, a visit from Luxembourg's finance minister also helped to strengthen economic relations. Following Luxembourg's removal from the list, the abovementioned penalty no longer applies to Luxembourg holding companies, thereby ending the uncertainty which previously surrounded the tax treatment of transactions between Luxembourgbased companies and their Brazilian counterparts. This increased assurance will help to promote Luxembourg products and services, and make business between the jurisdictions easier and more attractive.

The removal of Luxembourg gives the jurisdiction a competitive advantage over those jurisdictions that remain on the Grey List. Multinational corporations will want to consider this advantage when developing and evaluating corporate tax strategies. Jurisdictions that remain on the list include:

  • Uruguay (financial investment companies);
  • Denmark (holding companies with no business purpose);
  • the Netherlands (holding companies with no business purpose);
  • Iceland (international trading companies);
  • Hungary (offshore companies);
  • the United States (limited liability companies whose membership is composed of nonresidents who are not subject to federal income tax);
  • Spain (international holding companies); and
  • Malta (international trading companies and international holding companies).

Several other countries have also requested to be removed from the list. The Netherlands, Spain and Switzerland were temporarily removed from the list in 2010; however, definitive rulings are still pending.

Rulings on the pending petitions will provide further tax structuring opportunities and implications. Jurisdictions which have abolished those laws and regulations that granted preferential tax treatments should also be removed from the list. Rulings regarding the pending petitions are likely to depend on the jurisdictions' ability to convince Brazil that their revised laws no longer grant preferential tax treatments.

Footnote

1. Brazil has also taken measures to prevent the use of pass-through entities located in traditional tax regime jurisdictions. To avoid the increased tax withholding penalty associated with privileged tax regimes, cross-border payments made to related parties must have a business purpose. Major factors that are considered when determining business purpose include the presence of local business operations, a local management team and a proper location for engagement in business activities. The materials contained on this website are for general information purposes only and are subject to the disclaimer. ILO is a premium online legal update service for major companies and law firms worldwide. Inhouse corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.

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.

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