Brazil: Brazilian IRS Defines The Concept Of Substantial Economic Activity And Amends The List Of Privileged Tax Regimes And Low Tax Jurisdictions - Inclusion Of Austria And Ireland

The Brazilian Revenue Department published, on September 14, 2016, Normative Instruction No. 1,658 ( "IN 1,658 / 16"). IN 1,658/16 changes the wording of IN 1,037/10, which lists jurisdictions considered by the Brazilian tax authorities as low tax jurisdictions and privileged tax regimes.

IN 1,037/10 already provided that holding companies domiciled in the Netherlands and Denmark would be considered privileged tax regimes when they do not have substantial economic activity.

IN 1,658/16 clarifies that for the identification of these privileged regimes, the holding will be considered to perform a substantial economic activity when it has, in the country where is domiciled, appropriate operational capacity to carry out its corporate purpose, which is evidenced, among other factors, by the existence of skilled employees in sufficient number and adequate facilities for the exercise of management and effective decision-making related to: (i) the development of activities in order to earn income derived from the assets held by the holding; or (ii) the administration of equity interest held in other entities in order to earn income arising from the distribution of profits and capital gains.

Another amendment introduced by IN 1,658/16 is the inclusion of holding companies domiciled in Austria in the list of privileged tax regimes.

Different from what occurs with the Danish and Dutch holding companies, we emphasize that with respect to the Austrian holding companies, the classification as a privileged tax regime is not impacted by the performance of substantial economic activity.

In other words, according to the current wording of IN 1,037/10, as amended by IN 1,658/16, in principle any holding company incorporated in Austria shall be considered subject to a privileged tax regime.

The potential consequences resulting from the inclusion of the Austrian holding companies in the list of privileged tax regimes, which may vary according to the concrete case, are the following:

  1. reduction of the "debt equity ration" upon application of the thin cap rules, in case of loans extended by Austrian holding company to Brazilian entities;
  2. application of the transfer pricing rules to all transactions between Austrian holdings and Brazilian entities;
  3. With respect to the "CFC Regime", the prohibition to consolidate results of the Austrian holding and its subsidiaries for purposes of calculating the corporate income taxes in Brazil; and
  4. the prohibition to benefit from the presumed credit of 9% for Austrian holding and its direct and indirect subsidiaries, that carry out beverage manufacturing activities, manufacture of food products and construction of buildings and infrastructure, in addition to other manufacturing activities.
  5. Finally, IN 1,658/16 added Ireland, Curaçao and Saint Martin as low tax jurisdictions and excluded the Netherlands Antilles and St. Kitts and Nevi from the same list.

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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