Brazil: Deduction Of Royalties In Intragroup Transactions

Last Updated: 1 March 2016
Article by Marcelo Gustavo Silva Siqueira

We refer to the wrongful decision of the highest level of Brazil's tax administrative court1 (CSRF, Decision 9101-001.908 of May 13, 2014) against the deductibility for income tax purposes (IRPJ)2 of any royalties3 whatsoever (e.g. copyright royalties regarding software, books, songs, movie, magazine and cartoon characters) paid by a Brazilian company to its partners (individuals or legal entities, foreigners or not, with any shares), with the exception of royalties for patents and trademarks (forgetting that know-how is also included) regarding agreements signed from 1992 on with its foreign parent company. The case refers to software royalties.

Nowadays intellectual property licensing agreements (e.g. patent, trademark, know-how) – import of technology – are still subject to strict regulations regarding necessary clauses of the agreements and, specially, the amount to be paid/remitted/deducted for tax purposes (limited to royalties of 5% instead of other transfer pricing rules methods), involving the Brazilian Patent and Trademark Office (INPI), the Central Bank of Brazil (Bacen) and the Brazilian IRS (RFB).

Copyright royalties on the other hand are not subject to such restrictions and shall comply with Brazilian transfer pricing rules, although we are not aware of tax assessments in this regard.

In order to understand and proceed with the adequate interpretation of Brazilian regulatory tax legislation regarding royalties for intellectual property rights it is necessary to understand the historic perspective of its enactment since royalties for intellectual property rights were one of the first instruments of abusive international tax planning in Brazil.

In the 1950's Brazil taxed heavily a company's profit and its dividends with a joint taxation (income tax, compulsory loan, additional income tax and withholding income tax) that could reach 50% or more of such amounts. Royalties on the other hand were deductible without limitation and taxed by withholding income tax of 25%. There was also a shortage of dollars due to dividends remittances restrictions in several countries. Thus it was better to pay royalties than dividends.

Corporate groups always look to the whole taxation of its transactions and since royalties had a lower taxation, abusive royalty rates of 10%, 15% or more were established in intragroup transactions regarding patents, trademarks and know-how (technical assistance). The problematic was limited to the transactions regarding such intellectual property rights, with copyright not being an issue. Such royalties were above the highest rates between non-related parties transactions, which were of 3% or 4% tops (according to Brazilian IRS tax assessments back then).

Since royalties were fully deductible as a necessary expense without any quantitative limitation, such abusive royalties were deducted and remitted abroad resulting in loss of tax revenues to Brazil since only the withholding income tax over royalties was being paid.

In this scenario Brazilian legislation limiting royalty deduction for income tax purposes was first enacted in 1958 (art. 74 of law 3.470/58) regarding only the licensing of patents, trademarks and know-how (technical assistance). Copyright was not included. Back then - and now - a major problem was how to establish reasonable royalty rates.

With the lack of a clear method or fixed regime in this regard, Brazil chose to establish a royalty rate cap of 5% for deduction for income tax purposes (since between non-related parties transactions, the royalty rates were of 3% or 4% tops). Such rate was subject to regulation according to its necessity to the country (and not to the company), a clear non-fiscal purpose. Another requirement was the prior registration of the agreements in the Brazilian Patent and Trademark Office4.

Ministry of Finance's Rule 436/58 ("MF Rule 436/58") was enacted in this regard according to President Juscelino Kubitschek economic plan (Plano de Metas) and the goal of import substitution. Technologies necessary to develop Brazilian heavy industries were higher than others and trademarks were at the minimum rate of 1% since they do not add any technology to the country. MF Rule 436/58 has a non-fiscal (regulatory taxation) purpose and it has never been changed since then (only the inclusion of few new activities/technologies, such as information technology and, by IRS rulings, franchising and cultivars).

Such tax problem soon has become a balance of payments between the early 1960's and 1991 (Law 4.131/62), since royalties from group companies could not be deducted or remitted with the transfer of technology being a kind of performance requirement (technologies for free) for foreign companies investing in Brazil.

In the 1960's new tax provisions were enacted establishing the non-deductibility of royalties between companies and its partners (art. 71, sole paragraph, d of Law 4.506/64). While scholars and taxpayers always considered such provision limited to individuals, the Brazilian IRS wrongly insists (by reading the provision alone) that legal entities are also included.

In our view the non-deductibility of necessary expenses for fiscal purposes (even in transactions between related parties) is unconstitutional. Only in case of non-fiscal purposes and if observed the substantive due process of law requirement, it could be considered constitutional.

Also, the non-deductibility of royalties between companies and its partners shall not be interpreted alone, but jointly with other provisions and according to our historic analysis where patent, trademark and know-how royalties between Brazilian affiliate companies and its foreign parent companies were the ones resulting in abusive tax planning. An interpretation claiming that only these royalties are now deductible (while licensing from minority shareholders are not) is absurd and contrary to several other tax administrative court decisions against such limitation regarding e.g. copyright royalties, being also clearly against Brazil's goal to foster R&D&I of its companies (regarding transactions between Brazilian companies).


1 Câmara Superior de Recursos Fiscais – CSRF.

2 There is a discussion if such restriction also applies to CSLL, but this was not part of the trial.

3 Royalties are amounts due for the licensing of intellectual property rights. They are established as a percentage of the revenue of the products manufactured and sold by the licensee.

4 Back then, except the know-how one.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.