The Brazilian federal tax authorities enacted Regulation No. 1037 ("Instrução Normativa n. 1037/2010") on June 4, 2010 listing jurisdictions classified as tax havens and privileged tax regimes as defined by Brazilian tax legislation. This new blacklist was updated in light of the definitions contained in Federal Law No. 11,727 of June 23, 2008, which extended the definition of tax havens and introduced the concept of privileged tax regimes.
Under Brazilian legislation, tax havens are deemed to be jurisdictions that (i) impose no income tax or levy such tax at a maximum rate lower than 20%; or (ii) do not disclose information on the formal or economic ownership of corporate entities (i.e., corporate secrecy).
In addition to countries that were previously classified as tax havens, the following have been included in the new blacklist: Ascension Island, Brunei, French Polynesia, Kiribati, Norfolk Island, Qeshm Island, the Pitcairn Islands, Saint Helena, Saint Kitts and Nevis, Saint Pierre and Miquelon, the Solomon Islands, Swaziland, Switzerland and Tristan da Cunha.
It is also important to mention that Luxemburg, insofar as holding companies subject to the Luxembourgian Law of July 31, 1929 are concerned, as well as Malta, were excluded from the former blacklist.
Privileged tax regimes are considered those regimes which: (i) do not levy income tax, or levy it at maximum rate lower than 20%; (ii) provide tax advantages: (a) without requiring the performance of local substantive economic activity, or (b) conditioned to the absence of local substantive economic activity, (iii) do not tax or tax at a maximum rate of 20% income generated outside of its territory, or (iv) do not disclose information on the identification of corporate entities, of owners of assets or rights, or of parties of economic transactions.
Regulation No. 1,037/2010 considers the following regimes as being privileged tax regimes:
- Luxembourgian holding company regime;
- Uruguayan "Sociedades Financeiras de Inversão (Safis)" regime, up to December 31, 2010;
- Danish holding company regime;
- Dutch holding company tax regime;
- Icelandic International Trading Company (ITC) regime;
- Hungarian offshore KFT regime;
- US state limited liability company (LLC) regime, owned by non-residents and not subject to federal income tax (e.g., Delaware and Nevada);
- Spanish "Entidad de Tenencia de Valores Extranjeros (E.T.V.Es.)" regime; and
- Maltese International Trading Company (ITC) and International Holding Company (IHC) regimes.
Although Regulation No. 1,037/2010 does not expressly state, the new blacklist appears to be exhaustive and jurisdictions not included therein should not be considered as tax havens or privileged tax regimes for Brazilian tax purposes. This conclusion is consistent with the previous approach adopted by the tax authorities on such matter.
Possible effects of the new regulations are: (i) increase of the withholding tax rate to 25% on certain remittances of funds to residents in tax havens, in contrast to the ordinary 15% rate; (ii) application of transfer pricing rules to transactions involving Brazilian entities and entities located in tax havens or privileged fiscal regimes; and (iii) application of thin capitalization rules recently introduced in Brazil to transactions involving Brazilian entities and entities located in tax havens or privileged fiscal regimes; among others.
The new blacklist indicates that the Brazilian tax authorities continue to follow international transactions closely and should intensify audits in this area.. In this context, Brazilian taxpayers that have corporate, economic or commercial relations with entities included in jurisdictions listed in the new blacklist should examine or review their structure to avoid adverse tax consequences.
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.