Brazil: Consultation Ruling Denies IRRF Exemption On CRI Earnings

On September 21, 2017, the Federal Revenue of Brazil (RFB) published Consultation Ruling COSIT RFB 443/2017, which denies an exemption of the Withholding Income Tax (IRRF) for earnings of Certificates of Real Estate Receivables (CRI). The petitioner, a Brazilian subsidiary of a Canadian Government Agency, argued that CRI earnings should be exempt from IRRF because:

(1) CRI earnings, when paid to Agencies exclusively owned by the Canadian Government, are exempt from IRRF pursuant to Article 11(3) of the Brazil-Canada Tax Treaty; or

(2) Earnings paid to a foreign Government from a Brazilian source are exempt from IRRF pursuant to Article 688 of the Income Tax Regulations, and considering that the relevant Agency is exclusively owned by the Canadian Government, it is in essence a part of the Canadian Government.

The denial of RFB in Consultation Ruling 443/2017 is based on two key arguments. They are:

(i) The exemption in Article 11(3) is applicable to interest. Since CRI earnings are not interest, the exemption in Article 11(3) does not apply.

(ii) The exemption of Article 688 of the Income Tax Regulations is textually applicable to foreign Governments only, not to agencies of foreign Governments. Since Article 111 of the Brazilian Tax Code (CTN) requires that exemptions must be interpreted literally, Article 688 cannot be used to support an exemption of IRRF for CRI earnings of the Canadian Government Agency (because it is not the Canadian Government itself, even though it is exclusively owned by the Canadian Government).

Our Analysis:

We could criticize both arguments used by RFB to deny the exemption of IRRF in this case, but the argument in (ii) merits a more scholarly discussion about the definition of "literal interpretation" used by Article 111 of CTN. Some would argue that "literal" means "textual", but an Agency exclusively owned by the Government of Canada is a part of that Government, and therefore should be blessed with the exemption of IRRF found in Article 688 of the Income Tax Regulations. No "extensive" or "systematic interpretation" is required to reach that conclusion, even if one could argue that an Agency (as opposed to an Office or a Department) might engage in activities that fall outside of the scope of the "typical" activities of a Government, and therefore should be treated differently. That counterargument would be factually incorrect and unsustainable overall, due to the absence of a requirement in Article 688 that the earnings exempted from IRRF must be earnings, for example, "which are not derived from the normal course of typical business activities."

We believe that the strongest argument of the taxpayer here (in fact, the Brazilian subsidiary of the relevant Canadian Government Agency, which is liable for the collection of IRRF) is (1) above. RFB, therefore, is incorrect in its position stated in (i) above, simply because CRI earnings are included in the definition of interest for Treaty purposes (which is the relevant definition for granting or denying benefits involving interest in the Treaty). See the text of Article 11(4) of the Treaty below:

The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage , and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures , including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises. However, the term "interest" does not include income dealt with in Article X such as income from debt-claims which corresponds to a participation in the debtor's profits.

Notice that Article 11(4) does not state that a payment must be labelled as interest in order for the IRRF exemption to apply (in the case of a remittance from Brazil to Canada). All that matters is that the income in question falls under the definition of Article 11(4) above. If it does, it is interest for Treaty purposes, and its payment from a Brazilian source to a Canadian Government Agency must be exempted from IRRF in accordance with Article 11(3).

Now, see the legal definition of a CRI, pursuant to Article 6th of Law 9,514/1997:

The Certificate of Real Estate Receivables (CRI) is a nominative credit bond, freely negotiable, backed by real estate credits, which constitutes a promise of payment in cash.

That provision alone is capable of placing CRI earnings into the definition of interest in Article 11(4) of the Treaty, because, as seen above, it is immaterial that the actual payments derived from a CRI are labelled as interest. Regardless of that, Article 7th, item VIII, of Law 9,514/1997 establishes that one of the necessary features of a CRI is the stipulation of an "interest rate, fixed or fluctuating, and the dates of its payment, with the possibility of its capitalization." Also, the website of the Brazilian São Paulo Stock Exchange (BMF/BOVESPA) establishes that CRI earnings will generally be labelled as interest (alternatively, they may be remunerated via monetary adjustments).

Our last comment about that Consultation Ruling relates to the Commentary provided by the OECD to its Model Convention in 2014. In the reservations made to the Commentary on Article 11(3) in 2014, Canada has reserved the right "to amend the definition of interest so as to secure that interest payments treated as distributions under [its] domestic law fall within Article 10." (See p. C(11)-20.) Even if Canadian Law determined that CRI-like earnings should be regarded as distributions and therefore subject to Article 10, that reservation would not impact the application of the Treaty by Brazil, both because Brazil is not bound by Canada's interpretation of the Treaty in its decision of whether to impose IRRF or not on CRI earnings, and because Brazil is yet to become a member of the OECD. However, more importantly, in its capacity as a key partner of OECD, Brazil has declared positions on Article 11(3) which actually expand its scope: one relates to the inclusion of penalty charges for late payment (as established by domestic law) and the other considers as interest "any other income assimilated to income from money lent by the tax law of the Contracting State in which the income arises." (See p. P(11)-2.)

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 Mondaq.com.

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

Authors
 
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”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions