The Brazilian tax authorities issued Provisional Measure 252 (PM 252) on June 15, which granted specific tax incentives and created special tax regimes. These incentives were granted mainly to exporting local entities and also to the IT industry. The main changes/incentives set forth in PM 252 are summarized here:

Special tax regime for exports of IT services (REPES)

The REPES was established for companies whose activities consist exclusively in software development and the supply of IT services and whose exports represent more than 80% of their annual gross revenue from sales of goods and/or services. The percentage of export transactions over gross revenue will be controlled online by the Brazilian tax authorities and calculated over a three-year period.

The tax incentives granted under REPES consist of the suspension of the PIS (Program for Social Integration) and COFINS (Contribution for the Financing of Social Security) levied on importation of fixed assets and services used in software development and the supply of IT services. The fixed assets and services which give rise to the benefit are specifically defined by the Brazilian legislation. In addition, PIS and COFINS levied on gross revenues from sales of the above-mentioned goods/services are also suspended. PIS and COFINS are imposed to Brazilian entities at the general rates of 1.65% and 7.6% respectively.

Special tax regime for acquisition of capital goods for export companies (RECAP)

Likewise REPES, RECAP is a special tax regime established for local entities whose revenues from export transactions represent at least 80% of their total gross revenue from sales of goods and/or services in the previous calendar year from the adoption of the regime. To be eligible for the incentives, the Brazilian entity will need to maintain this percentage of export gross revenue for the following two calendar years.

The tax incentives granted to the beneficiaries consist of the suspension of the PIS and COFINS levied on importation of new capital goods (for example, machinery, equipment, and tools), which are specifically defined by the Brazilian legislation. In addition, PIS and COFINS levied on gross revenues from sales of the above-mentioned goods are also suspended.

It should be noted that newly incorporated entities, or entities that did not achieve the "80% of export revenue" requirement in the previous year, might be eligible for the RECAP if they can demonstrate that their revenues from export transactions represent at least 80% of their total gross revenue from sales of goods and/or services for the three subsequent years.

Credits - withholding income tax levied on royalties

As per MP 252, Brazilian entities will be allowed, from January 1 2006, to calculate credits of 20% over the withholding income tax levied on royalties or remuneration for technical or scientific services, which include technology transfer or know-how to the Brazilian entity, paid to a foreign entity. Brazil imposes withholding income tax on remittances for royalties and technical services/assistance at the rate of 15% (or 25% if the non-resident beneficiary is located in a country considered a tax haven for Brazilian tax purposes).

To be eligible to use the credits, the Brazilian entity will be required to invest in R&D undertaken in Brazil an amount equivalent to at least the double the amount of these credits.

It should be noted that further regulations are expected to be issued shortly by the authorities, which should provide additional information as regards to the calculation method and the use of the credits.

Capital gains on sales of personal property - individuals

Lastly, the MP 252 also increased the limit on the capital gains exemption for individuals from R$20,000 ($8,300) to R$35,000. In this regard, if the proceeds from the sale of personal property or any other assets of a similar nature exceed R$35,000 in the month of sale, the capital gain will be subject to tax at a rate of 15%. If the sales proceeds for the month do not exceed R$35,000, individuals are not liable to pay capital gains tax. As regards shares, the new R$ 35,000 limit would only be applicable if they are sold on stock exchanges; if the shares are sold outside stock exchanges, the capital gains exemption remains at R$20,000.

Nélio Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com), São Paulo