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Nélio Weiss |
Philippe Jeffrey |
On June 23 2008, the Brazilian Congress enacted Law 11,727/2008, which introduced, among other provisions, a broadened definition of low-taxed jurisdictions that will enter into force as of January 1 2009. Before the new law, low-taxed jurisdictions, also called tax havens, were considered countries which do not tax income or tax it at a rate lower than 20%. The latter definition is included as part of the Brazilian transfer pricing provisions, which comprise not only cross-border transactions with related parties, but also transactions with unrelated parties domiciled in a low-taxed jurisdiction.
Brazilian tax consequences on transactions with low-taxed jurisdictions can be summarised as follows: (i) merchandise and service transactions (including non-registered loan transactions) with low-taxed jurisdiction are subject to Brazilian transfer pricing regulation even if the beneficiary is not related to the Brazilian entity (in an arm's length transaction); (ii) remittances of income such as interest, service fees and royalties to a beneficiary located/domiciled in a low-taxed jurisdiction trigger Brazilian withholding income tax at the rate of 25% (rather that the usual 15% rate); and (iii) sales of Brazilian investments (for example shares) by a resident of a low-taxed jurisdiction trigger capital gains withholding tax at the rate of 25% (rather than the usual 15% rate).
In the a new provision introduced by law 11,727/2008, a country or dependency, which internal legislation does not allow access to information relating to the ownership of shares of local entities, and/or access to information relating to the actual beneficiary of earnings attributed to non-Brazilian residents, will also be considered a tax haven.
The new law also sets forth that the provisions regarding prices, costs and interest rates related to transfer pricing regulations are applied to transactions performed in privileged tax regime, between individuals or legal entities resident or domiciled in Brazil and any individuals or legal entities, even if not related, resident or domiciled abroad. According to the law, a privileged tax regime is considered to be the one which:
does not tax income or taxes it at a rate lower than 20%;
grants tax benefits to non-resident individuals or legal entities: (i) without requiring substantial economic activity in the country or jurisdiction; and (ii) to the extent that the non-resident does not conduct substantial economic activity in the country or jurisdiction;
does not tax or taxes at a rate lower than 20% earnings generated outside the territory of the respective country or jurisdiction; and
does not allow access to information relating to the ownership of shares of local entities, the ownership of goods and/or rights or information regarding economic transactions.
It is initially understood that the new definition of low-taxed jurisdictions focus mainly on transfer pricing provisions, that is, will have the effect to increase the transactions subject to transfer pricing. Nevertheless it is still unclear at this time to what extent the new provisions will affect cross border payments performed by Brazilian residents to beneficiaries located in tax havens (in other words potential increase on the withholding income tax rate applicable on interest, royalties and service payments, as well as capital gains). Further regulations are expected in this regard.
Nélio Weiss (nelio.weiss@br.pwc.com) & Philippe Jeffrey (philippe.jeffrey@br.pwc.com), São Paulo
