Brazil: Withholding tax obligation on the substitution of shares; New rules on documentation for Brazilian non-resident capital gains taxation

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Brazil: Withholding tax obligation on the substitution of shares; New rules on documentation for Brazilian non-resident capital gains taxation

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Fernando Giacobbo

Ruben Gottberg

Withholding tax obligation on the substitution of shares

Brazilian Federal Revenue (RFB, by its Portuguese acronym) issued Normative Instruction (NI) 1.664, establishing the responsible party for withholding income taxes on non-resident capital gains arising from the substitution of shares (incorporação de ações).

Under Brazilian legislation, a substitution of shares is a transaction where the whole share capital of a Brazilian entity is transferred into the equity of another Brazilian entity. As a result of this, the latter becomes the shareholder of the former (new shareholder).

According to NI 1.664, when it comes to the substitution of shares, the new shareholder is responsible for withholding income taxes on capital gains realised by non-residents upon the alienation of the transferring entity's shares.

Throughout the years, there has been a debate about whether the alienation of a transferring entity's shares is actually made by the shareholders. In some cases, administrative decisions have confirmed that the alienation has been made by the shareholders, whereas, in other instances, the decisions concluded that the alienation has been made by the transferring entity itself. NI 1.664, confirms ruling 224, issued by the tax authorities (Solução de Consulta COSIT 224), where the alienation is regarded as made by the shareholders.

Although NI 1.664 does not hold a legal status, it is important to note that tax inspectors are bound by this instrument when performing audits.

Multinationals are encouraged to analyse how these changes may affect their intended reorganisations.

New rules on documentation for Brazilian non-resident capital gains taxation

The RFB recently issued NI 1.662, modifying the options available to support the cost basis for calculating non-resident capital gains taxation.

Before NI 1.622 was issued, NI 1.455 provided two options to determine the cost basis for calculating non-resident capital gains taxation in situations where there was no suitable and proper documentation:

1) Based on the amount of foreign capital registered with the Brazilian Central Bank (BACEN); or

2) The cost basis equal to zero.

As of October 3 2016, NI 1.662 eliminates the option to determine the cost basis based on the amount of foreign capital registered with the BACEN where there is no suitable and proper documentation. This change has given rise to concerns as to whether the BACEN's electronic module of foreign direct investment, together with additional documentation, may be regarded as suitable and proper documentation when it comes to support the cost basis for calculating non-resident capital gains taxation.

Multinationals are encouraged to analyse how to address this change.

Fernando Giacobbo (fernando.giacobbo@br.pwc.com) and Ruben Gottberg (ruben.gottberg@br.pwc.com)

PwC

Website: www.pwc.com.br

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