Taxation of Profits of Controlled Foreign Companies (CFC): Double Taxation Conventions must prevail over domestic rules
The Superior Court of Justice (STJ) has recently decided a case
involving the applicability of Brazilian CFC rules in cases in
which the controlled company is located in a country with which
Brazil has a Convention for Avoidance of Double Taxation
(DTC).
Under the STJ decision, whenever there is a valid DTC, the profits
calculated by a controlled company cannot be taxed in Brazil by the
parent company since, in these cases, the DTC provisions must
prevail over domestic legislation. Consequently, based on the
application of DTC provisions, the STJ held that these profits will
be taxed only in the residence of the controlled company.
However, it should be noted that, although this precedent is
favorable to taxpayers, this issue is not yet settled in Brazilian
courts. This is especially so since federal attorneys are still
appealing these cases in order to bring this matter before the
Supreme Court (STF).
Tax Effects of IFRS adjustments and Changes in CFC rules converted into Law 12,973.
On May 14, 2014, Provisional Measure 627/13 was converted into
Law 12,973. As we have mentioned on other occasions, this
Provisional Measure introduced a number of changes to Brazilian tax
legislation in order to harmonize the calculation of Corporate
Income Tax ("IRPJ"), Social Tax on Net Profit
("CSLL"), Social Integration Program Tax
("PIS") and Social Security Financing Tax
("COFINS") with IFRS criteria. Apart from these changes,
the new rule also extinguished the Transitional Tax System (RTT)
and introduced a new tax on controlled foreign companies
(CFCs).
These changes in legislation will come into force in 2015. However,
taxpayers may choose to apply these changes already for the 2014
tax year. According to Normative Ruling 1,469, taxpayers who choose
to anticipate the effects of the new law for 2014 should formalize
this option though their tax return (DCTF – Federal Tax
Credits and Debits Statement) for taxes due in May, for which the
deadline is July 21.
Swiss Entities that Are Considered Established under a Privileged Tax System)
On June 6, 2010, the Brazilian government issued a new blacklist
under Normative Ruling ("Instrução
Normativa") 1,037/2010, which included Switzerland as a tax
haven.
However, in response to a Swiss government request, Brazilian tax
authorities immediately suspended Switzerland's blacklisted
status under Normative Ruling ("Ato Declaratório
Executivo") 11/2010, until a further review proceeding could
be completed.
This review proceeding was concluded on June 20, 2014, and the
Brazilian government issued Normative Ruling
("Instrução Normativa") 1,474/2014, which
repealed Switzerland's blacklisted status. However, entities
incorporated in Switzerland were included in a grey list (they are
considered to be established under a Privileged Tax System) in the
following cases:
When they are a holding company, domiciliary company, auxiliary company, mixed company or administrative company subject to a combined corporate income tax rate lower than 20% under federal, cantonal and municipal legislation; and
When they are other types of legal entities that are authorized by rulings issued by tax authorities and subject to a combined corporate income tax rate lower than 20%.
As a consequence, transactions between a Brazilian entity and a
grey-listed Swiss entity are subject to transfer pricing rules.
Also, the tax deductibility of interest expenses related to loan
agreements with a grey-listed Swiss entity that are incurred by a
Brazilian entity is subject to thin capitalization rules. In both
cases, it does not matter whether the parties are related.
Additionally, the thin capitalization rules governing the tax
deductibility limitations of the interest expenses related to loans
agreements with grey-listed lenders are more severe than the
limitations for loan agreements with related parties established in
places or under systems not classified as black or grey listed.
Government Reduces the IOF Rate levied on Foreign Loans to Zero
On 3 June 2014, the Brazilian government enacted Decree 8,263, reducing the rate of the Tax on Financial Transactions (IOF/Foreign Exchange) levied on loans agreements with maturity of over 180 days to zero. Before this decree, the zero rate was applicable, as a general rule, to loans with maturity of over 360 days.
São Paulo Simplifies State Drawback Procedures
The São Paulo State Treasury Office issued Decree 60,393,
to introduce changes to the procedures importers must comply with
in order to be granted with ICMS exemption on imports under the
drawback regime.
With these changes, it is no longer necessary to formally file the
Import Declaration (DI), the Tax Invoices and the Drawback Grant
Instrument with state authorities. However, importers must keep
these documents for at least for five years.
Brazil launches International Trade Single Window
Brazilian authorities have recently launched the International Trade Single Window, which will be implemented to bring together all systems involved in import and export procedures in order to simplify these transactions and reduce import/export customs clearance time.
SECEX revokes regulation on legal representation in trade defense procedures
The Foreign Trade Secretariat (SECEX) has revoked SECEX Ordinance 02/2014, which regulates the legal representation of interested parties (domestic or foreign) in trade defense procedures regarding antidumping and compensatory measures.
Originally published in Brazilian Tax Review 03/2014
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.