Executive Declaratory Act RFB 03/2015, published and effective as of December 23, 2015, has revoked the suspension of the Netherlands from the Brazilian list of Privileged Fiscal Regimes (informally known as the Brazilian graylist).
The suspension had been granted by Executive Declaratory Act RFB 10/2010, by virtue of a request made by the Government of the Netherlands, but it has been revoked now because the Government was unable to prove that the "content and effect of the applicable tax legislation justified a review of the [graylist] classification."
Given the publication of this new Executive Declaratory Act, the Dutch regime "applicable to legal entities incorporated as holding companies that do not perform substantial economic activities" is once more regarded as a Privileged Fiscal Regime. This classification is relevant for the following tax purposes in Brazil:
- Deductibility of expenses incurred before Dutch companies in the graylist:
Article 26 of Law 12,249/2010 establishes that the amounts paid, credited, delivered, used or remitted in any form, directly or indirectly, to persons that are beneficiaries of Privileged Fiscal Regimes are not deductible, unless the Brazilian taxpayer complies with three cumulative requirements. They are:
- the identification of the effective beneficiary of the entity abroad, which will be the recipient of these amounts;
- the presentation of evidence that the individual or legal entity abroad is operational (in general and for the purposes of the transaction under review; and
- the presentation of evidence of the payment of the corresponding price and of the receipt of goods and services, or of the utilization of a service.
It is important to highlight that the identification and presentation of evidence described in items (1) and (2) above may not be accepted by the Federal Revenue Secretariat of Brazil ("RFB") if the only or main purpose of placing this person in the transaction is to reduce the applicable tax burden of the transaction.
- Transfer Pricing:
Exports and imports of goods and services, as well as financial operations between Brazilian legal entities and graylisted Dutch entities are once more subject to transfer pricing rules, even if the relevant Dutch entity is not a related party in the parlance of Article 23 of Law 9,430/1996.
- Thin Capitalization:
Brazilian legal entities that incur debt obligations before graylisted Dutch entities may deduct corresponding interest for purposes of the Corporate Income Tax ("IRPJ") and the Social Contribution on Net Profits ("CSLL"), only:
- if these expenses are deemed as necessary, usual and effective for the maintenance of the economic activity of the payor;
- up until the limit in which the interest due complies with the applicable transfer pricing rules, even if the Dutch entity is not related to the Brazilian debtor; and
- if the total amount of relevant debt obligations is not superior to 30% (thirty per cent) of the net equity amount of the Brazilian entity. For purposes of comparison, the limit for debt obligations with legal entities not resident in tax havens and not beneficiaries of Privileged Fiscal Regimes is 02 (two) times the net equity of the payor, or 02 (two) times the share of the recipient in the net equity of the payor.
- Controlled Foreign Company ("CFC") Rules:
With the publication of this new Executive Declaratory Act, graylisted Dutch entities will be regarded as related to the relevant Brazilian legal entity, when both own stock in a target affiliated foreign entity. This deemed relationship is aimed at classifying the Brazilian legal entity as an "equivalent controller" of the foreign entity for purposes of the CFC rules (i.e., a situation in which the Brazilian entity, together with related parties, would own more than 50% of the stock of the target affiliated foreign entity). In this situation, the Brazilian legal entity would be subject to CFC rules, and consequently required to pay IRPJ and CSLL on foreign profits in the accrual method (i.e., irrespective of the distribution of dividends).
In order to disprove the deemed relationship, the Brazilian legal entity would be required by RFB to prove that controllers of the Dutch entity are not related parties, in accordance with Article 83, sole paragraph, items I to V, of Law 12,973/2014.
Besides, with regard to any controlled or equivalently controlled graylisted Dutch entities, the Brazilian legal entity:
- shall not include its year-end results in the consolidation provided by Article 78 of Law 12,973/2014;
- shall include year-end results in its IRPJ and CSLL taxable basis pursuant to the accrual method, even if the Dutch entity is merely affiliated (not controlled) by the Brazilian entity; and
- shall not be able to pay the corresponding IRPJ and CSLL in up to 08 (eight) installments. The Brazilian legal entity shall be required to pay these taxes in the calendar year subsequent to the one in which the profits have been earned.
Although Brazil and the Netherlands have signed a Bilateral Income Tax Treaty ("BITT") in 1990, the terms of this BITT do not specifically prevent the application of CFC rules.
Nonetheless, the Federal Supreme Court ("STF") is yet to issue a definitive ruling on the subject of whether the existence of a BITT with other countries, in and of itself, would be sufficient to prevent the application of CFC rules (because all treaties contain Article 7th, which may prevent Business Profits of a Dutch entity from being subject to IRPJ and CSLL in the absence of a permanent establishment).
- Transfer of Tax Residence of Individuals:
The transfer of the tax residence of individuals currently resident in Brazil to the Netherlands (as a country that is home to a Privileged Fiscal Regime) shall have its effects recognized only after the date in which the taxpayer proves:
- that the taxpayer is a de facto resident in the Netherlands; or
- that the taxpayer is subject to taxes on the totality of revenues from labor and capital, as well as that the applicable taxes have actually been paid.
One should note that, in any case, individuals that leave Brazil either temporarily or permanently will continue to be regarded as Brazilian residents in the first 12 (twelve) consecutive months of absence, if a Communication of Definitive Exit from the Country is not presented from the date of the exit or the characterization of a non-resident status up until the last day of February of the subsequent calendar year.
- Taxation of Services of Assessment of Compliance, Metrology, Normalization, Sanitary and Phytosanitary Inspection, Homologation, Registration and Other Procedures required by the Importing Country under the scope of WTO Agreements:
The importation of the following services from graylisted Dutch entities will once more be subject to WHT, to the Special Tax on Royalties ("CIDE"), and to the Social Contributions on Importations ("PIS/COFINS-Import"):
- services of assessment of compliance, metrology and normalization;
- services of sanitary and phytosanitary inspection;
- services of homologation and registration; and
- other procedures required by the Importing Country, under the scope of the agreements dealing with sanitary and phytosanitary measures ("SPS"), and with technical barriers to trade ("TBT"), both as provided by the World Trade Organization ("WTO").
The general rates applicable to the importation of these services are 15% for IRRF and 10% for CIDE. For PIS/COFINS-Import, the aggregate rates are 9.25%. Prior to the publication of the new Executive Declaratory Act, the three taxes, for these specific services, were set at a zero rate.
It is important to highlight that there is still one Privileged Fiscal Regime suspended from the list contained in Article 2nd of Normative Instruction RFB 1,037/2010: it is the tax regime applicable to Spanish entities incorporated under the form of Entidad de Tenencia de Valores Extranjeros ("ETVE"). This tax regime was suspended by the Executive Declaratory Act RFB 22/2010, and this suspension is yet to be confirmed or revoked by a future Executive Declaratory Act.
(*) with the collaboration of Lucas Carvalho (email@example.com), associate of TozziniFreire's tax team.
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.