Brazil: The Development Of The Definition Of Tax Haven In Brazil

Like many other developed countries, from time to time the Brazilian government refines and adjusts the legal definition of tax haven jurisdiction (paraíso fiscal)1, initially established by Law No. 9.430, of December 27, 1996, which introduced the transfer pricing regulations in Brazil. These changes aims to gradually reduce and close almost all the tax planning structures and alternatives envisaged by creative business lawyers based on offshore vehicles. The latest change was recently made by Law No. 11.941, of May 27, 2009 and is commented herein.

To better understand the consequences of this constant evolution, it is essential to list the various rules governing this subject in their chronological order:

  1. article 14 of Law 9.430/96 defined for the first time the concept of tax haven or fiscal paradise using the expression "favored taxation country" (pais com tributação favorecida), comprising any country that does not impose tax on income or, when imposes, it is a low-tax country, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum);
  2. article 8 of Law No. 9.779, of January 19, 1999, increased the withholding income tax rate due by non-residents domiciled in tax haven countries from 15% (the basic rate) to 25%. This taxation applies to remittances or payments of interest, royalties or service fees but not on dividends (which are not taxable in Brazil);
  3. Law No. 9.959, of January 27, 2000, created an adverse tax regime discriminating investments originated from tax haven countries;
  4. Law No. 10.451, of May 10, 2002, added a new paragraph (§ 3) to article 24 of Law 9.430/96, classifying separately the taxation of work (labor) and capital (investment), as well as dependencies of the country of residence or domicile. Furthermore, article 4 of Law 10.451/02 sets forth that the transfer pricing regulations of Law 9.430/96 regarding prices, costs and interest rates also apply to transactions made by any individual or legal entity resident or domiciled in Brazil with any individual or legal entity, related or not, resident or domiciled in a country or dependency whose national legislation allows secrecy about the capital stock structure or ownership of the companies organized under the laws of such jurisdiction, i.e. requires confidentiality on who are the ultimate beneficiary holders of the legal entity and consequently does not permit the disclosure of the names of the partners or shareholders of the company;
  5. article 47 of Law No. 10.833, of December 29, 2003, determined that capital gains arising out of transactions in which the beneficiary is resident or domiciled in a country or dependency with favored taxation, as provided for in article 24 of Law 9.430/96, is subject to the withholding income tax at the rate of 25%;
  6. article 23 of Law No. 11.727, of June 23, 2008, approved new wording for articles 24-A and 24-B of Law 9.430/96, introducing the concept of privileged fiscal regime (regime fiscal privilegiado). According to the sole paragraph of article 24-A, for the purposes of the law, "privileged fiscal regime" means any jurisdiction that:

    1. does not tax income or where the maximum applicable tax income rate is below 20%;
    2. grants fiscal advantages to a non-resident individual or legal entity:

      1. without requiring that substantial economic activity be made in the country or dependency;
      2. conditioned to the non-exercise of substantial economic activity in the country or dependency;

    3. does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20% to such earnings;
    4. does not permit access to information regarding the capital stock structure, ownership of assets or rights or to the economic transaction entered into between the parties.

    Article 24-B authorizes the Executive Branch to reduce or change at any time the percentages mentioned in articles 24 and 24-A.
  7. finally, article 30 of Law 11.941/09 clarified that, for the purposes of article 24-A of Law 9.430/96, a country or dependency will be deemed as "privileged fiscal regime" whenever one or more of the requirements listed in the sole paragraph of article 24-A be complied with.

Prior to the enactment of Law 11.941/09 many Brazilian lawyers argued that to be treated as a "privileged fiscal regime" a country or dependency should attend simultaneously and cumulatively all the requirements listed in the sole paragraph of article 24-A of Law 9.430/96. Now this discussion is terminated for good and it is sufficient to attend one sole of the items to receive the "privileged fiscal regiment" treatment in Brazil.

It is also important to mention that all the "tax haven countries" used for tax planning purposes, have been included in a list of countries/dependencies favored or exempt from taxation ("black list") by the Brazilian Federal Revenue Office (Secretaria da Receita Federal – SRF) and are also known as "black-listed jurisdictions"2. It is expected that in the near future the SRF will review the existing "black list" and issue a new list will all the affected jurisdictions, incorporating the concept of "privileged fiscal regime", which is broader, and probably excluding some of the countries from the "black list"3.

Footnotes

1. Traditionally, Brazilian regulatory authorities do not like offshore jurisdictions in general because they believe that these jurisdictions have been misused in the recent past with the specific purpose of  (i) avoiding the payment of local taxes and/or (ii) not disclosing the identity of the true beneficiaries of the assets (which could be Brazilian residents pretending to be foreign investors just to avoid the reporting and other compliance requirements) and many times to facilitate transactions which would be regarded as questionable or illegal in the jurisdiction of domicile of the true beneficiaries. The fact is that the traditional offshore jurisdictions, the so-called "tax haven countries" have a bad image in many countries and not only in Brazil.

2. The current "black-listed jurisdictions" are expressly mentioned in SRF Normative Instruction nº 188, of August 9, 2002, and include the following countries: (i) Andorra; (ii) Anguilla; (iii) Antigua and Barbuda; (iv) Netherlands Antilles; (v) Aruba; (vi) The Bahamas; (vii) Bahrein; (viii) Barbados. (ix) Belize; (x) Bermuda; (xi) Campione d`Italia; (xii) Channel Islands (Alderney, Guernsey, Jersey and Sark); (xiii) Cayman Islands; (xiv) Cyprus; (xv) Singapore; (xvi) Cook Islands; (xvii) Costa Rica; (xviii) Djibouti. (xix) Dominica; (xx) United Arab Emirates; (xxi) Gibraltar; (xxii) Granada; (xxiii) Hong Kong; (xxiv) Labuan; (xxv) Lebanon; (xxvi) Liberia; (xxvii) Liechtenstein; (xxviii) Luxembourg (concerning holding companies governed by local Law dated July 31. 1929); (xxix) Macau; (xxx) Madeira Island; (xxxi) Maldives; (xxxii) Malta; (xxxiii) Isle of Man; (xxxiv) Marshall Islands; (xxxv) Mauritius; (xxxvi) Monaco; (xxxvii) Monteserrat; (xxxviii) Nauru; (xxxix) Niue Island. (xl) Oman; (xli) Panama; (xlii) St. Kitts and Nevis; (xliii) American Samoa; (xliv) Eastern Samoa; (xlv) San Marino; (xlvi) Saint Vincent and the Grenadines. (xlvii) St. Lucia; (xlviii) Seychelles; (xlix) Tonga; (l) Turks and Caicos Islands. (li) Vanuatu; (lii) U.S. Virgin Islands; (liii) British Virgin Islands.

3. These rules may also be applied exceptionally and in a restricted way to countries which are members of economic blocks having Brazil as one of the participants. This may affect, for instance, Uruguay, which is a member of Mercosur, is considered a "tax haven country" and for political reasons was never "black listed" in Brazil. There is also a general consensus among all the Brazilian tax lawyers that the Delaware and Nevada corporations can also be included among the affected entities and that both US States fit in the concept of "privileged fiscal regime".

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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Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
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