Keywords: Brazil, IRS, tax rules, FCONT, RTT

The Federal Revenue Office published Normative Instruction No. 1,492/2014 on September 18, 2014, amending the provisions of Instruction No 1,397/2013 regarding the Transition Tax Regime (RTT).

Among the rules established by the Normative Instruction, the highlights include the following:

  • Section No. 75, Law 12,973/2014 provides that the legal entity may choose to apply the provisions contained in articles 1, 2, and 4 through 70 of this law for the calendar year 2014. Thus, the new Normative Instruction provides that entities which opt in, pursuant to this article, shall be subject to RTT until December 31, 2013, while those companies that do not opt ​​in shall be subject to RTT until December 31, 2014.
  • The obligation to deliver the information required to generate the Tax-Accounting Transition Control (FCONT) remains until the end of calendar year 2014 for legal entities subject to the RTT.
  • For the purposes of calculating the limits of deduction related to the interest paid or credited individually to owner, partners or shareholders as remuneration on own capital, the following factors ​​will be considered, according to the accounting methods in effect on December 31, 2007: (i) the net worth accounts and (ii) the profits, calculated before the deduction of interest, or retained earnings and profit reserves. The calculation of the legal limits can also take into consideration these factors​​, according to the methods specified in Law 6404/76, since the amounts related to equity adjustments are not applicable. It should be mentioned that the company opting in pursuant to Article 75 of Law 12,973 / 2014 must follow the measurement methods defined in Law 6404/76, other options being prohibited.
  • The taxpayer shall prepare, in each period of assessment, the actual profits statement, specifying the net income for corporate purposes; specific adjustment RTT; and net income for the period of assessment, among other specifications.
  • The FCONT will be generated from the bookkeeping for corporate purposes, expunging or inserting, as applicable, the assessment reported in the Validator Program of Data Entry for Tax-Accounting Transition Control.
  • The surplus portion of profits or dividends calculated based on the results ascertained between January 1, 2008, and December 31, 2013, will not be subject to withholding income tax, nor will it integrate the calculation basis of the income tax and the contribution on profits of the beneficiary, individual or legal entity, whether domiciled in Brazil or abroad. However, the surplus portion of profits or dividends calculated based on the results ascertained in the year 2014 should be computed on the calculation basis of the Income Tax and contribution on profits, for legal entities domiciled in the country, as well as, among other provisions, be subject to withholding income tax at the tax rate of 15% in the case of a beneficiary resident or domiciled abroad;
  • The Normative Instruction also authorizes the taxpayers to assess, using the net worth as provided for in articles 243 and 248 of Law 6.404/1976, investments in associates, subsidiaries and other related companies.
  • Finally, there is the possibility of the entity assessing the investment using the net worth of the associate or subsidiary company, in accordance with the provisions of Law 6404 of 1976. However, if the taxpayer has made the option provided for in article 75 of Law No. 12,973, the investment should be mandatorily assessed according to Law 6404/76.

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.