On June 4, 2010, the Secretary of the Brazilian Federal Revenue Office (Receita Federal do Brasil – RFB) issued RFB Normative Instruction nº 1037, which contains an updated list of favored taxation countries (países com tributação favorecida) formed by the so-called "tax haven countries" (paraísos fiscais)1. The new list is in full force and effect as from June 7, 2010, date of its publication in the Official Gazette of the Union (Diário Oficial da União – DOU)
For the purpose of this list (which is deemed to be a "black-list"), the Brazilian tax authorities included the countries or dependencies that, according to the Brazilian Government, do not impose tax on income or, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum), as well as whose national legislation does not allow access to the information regarding the capital stock structure or ownership of the legal entities organized under the laws of any such jurisdiction. The current list comprises the following jurisdictions: (i) Andorra; (ii) Anguilla; (iii) Antigua and Barbuda; (iv) Netherlands Antilles; (v) Aruba; (vi) Ascension Island; (vii) The Commonwealth of The Bahamas; (viii) Bahrein; (ix) Barbados. (x) Belize; (xi) The Bermuda Islands; (xii) Brunei; (xiii) Campione d`Italia; (xiv) Channel Islands (Alderney, Guernsey, Jersey and Sark); (xv) Cayman Islands; (xvi) Cyprus; (xvii) Singapore; (xviii) Cook Islands; (xix) Costa Rica; (xx) Djibouti; (xxi) Dominica; (xxii) United Arab Emirates; (xxiii) Gibraltar; (xxiv) Granada; (xxv) Hong Kong; (xxvi) Kiribati; (xxvii) Labuan; (xxviii) Lebanon; (xxix) Liberia; (xxx) Liechtenstein;; (xxxi) Macau; (xxxii) Madeira Island; (xxxiii) Maldives; (xxxiv) Isle of Man; (xxxv) Marshall Islands; (xxxvi) Mauritius Island; (xxxvii) Monaco; (xxxviii) Montserrat Island; (xxxix) Nauru; (xl) Niue Island; (xl) Norfolk Island (xlii) Panama; (xliii) Pitcairn Islands; (xliv) French Polynesia; (xlv) Qeshm Island; (xlvi) American Samoa; (xlvii) Eastern Samoa; (xlviii) San Marino; (xlix) Saint Helena Island; (l) Saint Lucia; (li) The Federation of Saint Kitts and Nevis2; (lii) Saint-Pierre and Miquelon Island; (liii) Saint Vincent and the Grenadines; (liv) Seychelles; (lv) Solomon Islands; (lvi) The Kingdom of Swaziland; (lvii) Switzerland; (lviii) The Sultanate of Oman; (lix) Tonga; (lx) Tristan da Cunha; (lxi) Turks and Caicos Islands; (lxii) Vanuatu; (lxiii) U.S. Virgin Islands; (lxiv) British Virgin Islands.
The novelties in relation to the former list of 2002 are Switzerland and the following additional offshore jurisdictions: Ascension Island, Brunei, Kiribati, Norfolk Island, Pitcairn Islands, French Polynesia, Qeshm Island, Saint Helena Island, Saint-Pierre and Miquelon Island, Solomon Islands, The Kingdom of Swaziland and Tristan da Cunha. Luxembourg was eliminated from this list and included as a privileged fiscal regime, as commented below.
The main consequence is that the listed countries and dependencies are subject to a higher withholding income tax rate on the remittance abroad of capital gains and of the remuneration due for rendering of services, which is equivalent to 25%. For countries in jurisdictions which do not fall into this category, the applicable rate is only 15%. The same rates are valid in the case of payment of interest on net equity (juros sobre capital próprio) for both situations. The tax exemption applied to income earned in Brazilian Private Equity Funds (Fundos de Investimento em Participação – FIPs) is not applicable.
The current applicable taxation rules for investments in the Brazilian financial and capital markets must also be observed. In the case of foreign investors, these rules may be summarized as indicated herein. There is an income tax withheld at source at the following: (i) for stocks, futures and listed options, public securities: zero rate; (ii) for funds and over-the-counter (OTC) derivatives: 10%; and (iii) for interest and capital earnings: 15%. Only for investors with head offices in favored taxation countries or dependencies, the applicable tax rate is established by the same rules applied to Brazilian residents, as follows: (a) period of up to 180 days: 22.5%; (b) period from 181 days up to 360 days: 20.0%; (c) period from 361 days up to 720 days: 17.5%; and (d) period above 721 days: 15%. There is also the tax on financial operations (IOF) for all investors at the following rates: (a) for short term investments, charged on fixed income earnings for applications of less than 30 days; decreasing rates from 96% to zero, according to the period of application; (b) 2% rate applied to entry of variable income and fixed income foreign investments; and (c) 1.5% rate on fixed income financial investment, National Treasury bonds and Depositary Receipts (DRs).
Furthermore, for the first time the RFB also identifies the entities which are subject to the concept of "privileged fiscal regime" (regime fiscal privilegiado)3 and must obey the Brazilian transfer pricing rules. These rules basically require the adjustment of the revenues and expenses in transactions entered into between related parties4, when there is over-invoicing or under-invoicing related to import and export operations, in order to avoid that part of the profit of the Brazilian company that normally would be taxed in Brazil if the transaction was structured otherwise be transferred to another foreign company based in a favored taxation country or dependency or is deemed to be subject to a privileged fiscal regime with the sole and exclusive purpose of saving the corresponding Brazilian tax. The same principle also applies if the transaction involves an unrelated company, i.e. a foreign legal entity without any formal relationship with the Brazilian company, but is made with the same purpose (avoid the payment of the corresponding Brazilian tax).
In addition, Brazilian thin capitalization rules established by Provisional Measure nº 472, of December 15, 2009, must be duly observed. This means that in the case of intercompany loans between a foreign legal entity which is domiciled in a favored taxation country or dependency or is deemed to be subject to a privileged fiscal regime, as lender, and a Brazilian company, as borrower, the interest paid by the Brazilian borrower to the foreign lender will only be deductible for income tax purposes if the debt/equity ratio of the Brazilian borrower does not exceed 30% of its net worth value.
Therefore, under the current legislation, the foreign companies subject to a privileged fiscal regime are only adversely affected by the transfer pricing and thin capitalization rules outlined above, which also apply to the companies with head offices in favored taxation countries or dependencies.
Normative Instruction 1037/2010 classifies as privileged fiscal regime:
- in the case of Luxembourg, the regime applied to the entities incorporated in the form of holding company (Luxembourg Holding Company);
- in the case of Uruguay, the regime applied to the entities incorporated in the form of Sociedad Financiera de Inversion (SAFI), which is the Uruguayan Financial Service Corporation which will exist until December 31, 2010;
- in the case of Denmark, the regime applied to the entities incorporated in the form of holding company (Danish Holding Company);
- in the case of Netherlands (Holland), the regime applied to the entities incorporated in the form of holding company (Dutch Holding Company);
- in the case of Iceland, the regime applied to the entities incorporated in the form of International Trading Company (ITC);
- in the case of Hungary, the regime applied to the entities incorporated in the form of the offshore KFT, which is the acronym for Korlátolt Felelõsségû Társaság (the Hungarian Limited Liability Corporation);
- in the case of the United States of America, the regime applied to the entities incorporated in the form of Limited Liability Company (LLC) whose equity participation is formed by non-residents, which are not subject to the US federal income tax, such as Delaware, Nevada, Florida and other US states which adopt a similar regime;
- in the case of Spain, the regime applied to the entities incorporated in the form of Entidad de Tenencia de Valores Extranjeros (ETVE), which is the International Spanish Holding Company; and
- in the case of Malta, the regime applied to the entities incorporated in the form of International Trading Company (ITC) and International Holding Company (IHC).
It is important to bear in mind that the list and classification contained in Normative Instruction 1037/2010 can be reviewed by the RFB at any time for the purpose of including other jurisdictions either as a favored taxation country or dependency and/or in the category of privileged fiscal regime, at the discretion of the Brazilian Government.
1. The expression "favored taxation country or dependency" (país ou dependência com tributação favorecida) is used in the Brazilian tax legislation instead of tax haven or fiscal paradise and means any country or dependency of a 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). The definition is contained in article 14 of Law 9.430, of December 27, 1996, which introduced the transfer pricing regulations in Brazil.
2. Probably by mistake, the RFB included Saint Kitts (also known as Saint Christopher) and Nevis twice in Normative Instruction 1037/2010.
3. For the purpose of the Brazilian tax legislation, "privileged fiscal regime" (regime fiscal privilegiado) means any jurisdiction that met one or more of the following requirements: (i) it does not tax income or where the maximum applicable tax income rate is below 20%; (ii) it grants fiscal advantages to a non-resident individual or legal entity: (a) without requiring that substantial economic activity be made in the country or dependency; or (b) conditioned to the non-exercise of substantial economic activity in the country or dependency; (iii) it does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20% to such earnings; (iv) it 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. All these percentages may be reduced or changed at any time by the Executive Branch. This concept is provided for in article 23 of Law No. 11.727, of June 23, 2008, which approved new wording for articles 24-A and 24-B of Law 9.430/96. Article 30 of Law 11.941/2009, clarified that it is not necessary to attend simultaneously and cumulatively all the requirements listed above and that it is sufficient to attend only one for a country or dependency to be treated as a privileged fiscal regime.
4. The meaning of "related party", which includes any individual or legal entity resident or domiciled abroad (outside Brazil) whose capital stock characterizes its controller or affiliate as defined pursuant to Law No. 6.404, of December 15, 1976 as subsequently amended (the Brazilian Corporation Law – BCL). Affiliate (coligada) is a company in which the investor has a significant influence over it (article 243, § 1 of the BCL, as amended by Law No. 11.941, of May 27, 2009). One company will have significant influence over another when it holds or exercises the power to participate in decisions on financial or operational policies of the affiliate (article 243, § 4 of the BCL, added by Law 11.941/2009). Significant influence is presumed to exist when one company holds at least 20% of the voting stock of another, but does not control it (article 243, § 5 of the BCL, added by Law 11.941/2009). Controlled company (controlada) is a company in which another company, known as the controller (controladora), either directly or through other controlled companies, has the rights of a partner in the first company which permanently grants to the controller prevalence in voting the first company´s corporate decisions and the power to elect the majority of its management (article 243, § 2 of the BCL). For tax purposes, the following entities will be deemed to be related to the Brazilian company: (a) the parent company, when domiciled abroad; (b) an offshore branch (filial) or dependency (sucursal); (c) any individual or legal entity resident or domiciled abroad who/which is its controller or affiliate, as defined by the BCL; (d) any legal entity domiciled abroad which may be deemed as its controlled company or affiliate, pursuant to the BCL; (e) any legal entity domiciled abroad when both such non-resident company and the Brazilian company are under the same corporate control or common administration or when at least 10% of the capital stock of each one belongs to the same individual or legal entity; (f) any individual or legal entity resident or domiciled abroad who/which, jointly with the Brazilian company, holds an equity participation in a third company and the aggregate sum of the participations characterizes them as controllers or affiliates, as defined by the BCL; (g) any individual or legal entity resident or domiciled abroad who/which is an associate of the Brazilian company in any undertaking through the formation of a consortium or condominium; (h) any individual resident abroad who is a relative or collateral of any kind (relative in-law) up to the third degree, spouse or companion of any of the Brazilian company´s directors or of its direct or indirect controlling partner or shareholder; (i) any individual or legal entity resident or domiciled abroad who/which is its exclusive agent, distributor or grantee (concessionário) for the purchase and sale of goods, services or rights; and (j) any individual or legal entity resident or domiciled abroad to whom/which the Brazilian company is the exclusive agent, distributor or grantee for the purchase and sale of goods, services or rights. The concept of "related party" (pessoa vinculada), for tax purposes, is contained in article 23 of Law No. 9.430/1996. Under Brazilian law the consortium and the condominium are not legal entities but different forms of joint ventures. The condominium is basically the common ownership of an asset which is governed by articles 1.314 to 1.358 of the Brazilian Civil Code (Law No. 10.406, of January 10, 2002). The consortium is a contract governed by articles 278 and 279 of the BCL and must be registered at the Commercial Registry of the place where its head office is located.
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.