Brazil: Brazilian Tax Review – September/October 2016

NEW LAW GOVERNS INCENTIVES FOR ANGEL INVESTORS IN STARTUPS

Supplementary Law 155/2016 sets forth new provisions to govern legal aspects related to the capital contributions made by angel investors in startups. Under the new law, Microenterprises (ME) and Small Businesses (EPP) can receive capital contributions from individuals or legal entities (including investment funds), and these contributions can be kept separate from the company's share capital. Thus qualified, angel investors can invest in projects without joining the corporate structure of the company invested in and the company's activity will be conducted solely by the owners.

This new relationship must be governed by a participation agreement, with guidelines determined by law.

It is important to emphasize that these contributions are not considered revenue for the companies invested in and do not affect the limits for the Simples Tax method.

The new rules take effect on January 1, 2017.

THE SUPREME COURT HOLDS THAT OVERPAID ICMS-SUBSTITION TAX MUST BE REFUNDED TO RETAIL STORES

The Supreme Court issued a decision holding that Brazilian States must refund taxpayers for ICMS (State VAT) collected under the tax substitution method when the final sale price is lower than the presumed amount used for the tax calculation basis.

Under the ICMS-Substitution system, the first link of the commercial chain must pay the ICMS (VAT) due on the subsequent transactions based on a presumed calculation basis. Before the new Supreme Court decision, retailers could not be refunded for the overpaid ICMS in cases where the actual retail price was lower than the presumed basis. This has now changed with the new Supreme Court decision, even though there are still questions about the concrete effects of this decision.

Since the appeal was decided under the general repercussion system, this holding is binding on all future cases.

ARGENTINA AND BRAZIL ARE TESTING A SYSTEM FOR ISSUING DIGITAL CERTIFICATES OF ORIGIN

Brazil and Argentina have implemented a system for a three-month test to issue digital Certificates of Origin, which are documents used to attest the origin of products in order to allow them to benefit from preferential trade tariffs. Customs authorities in both countries selected importers and exporters to take part in the pilot project.

The system is intended to reduce the amount of paperwork, costs and time necessary to issue certificates of origin.

BRAZIL SIMPLIFIES EXPORT PROCEDURES FOR MICRO AND SMALL COMPANIES – SIMPLE EXPORTS

The Brazilian Government issued Decree 8,870 in October 2016 to provide simplified export procedures for micro and small businesses (under the name "Simple Exports"). The new rule aims to simplify processes for licenses, permits and customs procedures.

Transactions related to micro and small businesses can be performed by a logistics operator that will be in charge of licenses, permits, customs clearance procedures, cargo consolidation, transportation and storage.

The actual implementation of these procedures depends on rules to be issued by the Brazilian IRS.

BRAZILIAN IRS UPDATES THE LIST OF TAX HAVEN AND PRIVILEGED TAX REGIMES

In September 2016, the Brazilian IRS issued Normative Instruction 1,658, which adds Ireland, Saint-Martin and Curacao to the list of tax havens and Austrian holding companies to the list of privileged tax regimes.

It bears noting that transactions carried out with entities in privileged tax regimes are subject to: (1) transfer pricing and thin capitalization calculation; and (2) identification of the effective beneficiary of the payments in order for the expenses to be deductible from corporate income tax and the Social Contribution on Net Profit ("CSLL"). Besides these impacts, the legislation also provides that certain payments made to entities in tax havens (such as interest, capital gain, services and royalties) are subject to an increased rate of 25% of Withholding Income Tax instead of the regular rate of 15%.

Therefore, with the inclusions made by Normative Instruction 1,658, transactions conducted with these countries must observe the requirements mentioned above.

FEDERAL COURT IN SÃO PAULO REJECTS PIS AND COFINS TAXATION ON FINANCIAL REVENUE FROM TECHNICAL RESERVES

In a decision issued in September 2015, the Federal Court in São Paulo rejected PIS and COFINS taxation under Law 12,973/14 on financial revenue earned by insurance companies with investments made through their technical reserves.

According to the judge who decided the case, PIS and COFINS should be levied only on revenue derived from the main activity carried out by the insurance company. Since these financial revenues are not a result of the main activity of these companies, but rather income earned in order to comply with a legal obligation to guarantee the liquidity and solvency of the insurers, it should not be subject to the mentioned taxes.

Although this decision is not binding case law on the matter, it is one of the first signs of the plausibility of the arguments regarding the calculation basis of PIS and COFINS under the Law of 12,973/14 for insurance companies.

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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