Brazil clarifies tax treatment of international charter leasing payments
Brazilian tax authorities have provided guidance on the application of the reduced 0% income withholding tax rate on international charter leasing payments.
The federal Brazilian tax authorities (RFB) published on September 28 2018 Solução de Consulta – Cosit 166/2018 (dated September 26 2018), stating that the reduced rate of 0% income withholding tax may apply on amounts as consideration for international charter leasing of boats/vessels, but the beneficiary must not be located in a jurisdiction considered a tax haven. Further, it said that the reduced rate of 0% may still apply where the international remittance is made by a third party located in Brazil directly, rather than the entity that is performing the leasing.
By way of background, there are specific rules providing for a reduced rate of income withholding tax to 0% in circumstances involving charter leasing of boats, where the beneficiary of the remittance is not located in a tax haven. This benefit is subject to specific rules and restrictions, where the lessor of the vessel (or a related party of the lessor) is simultaneously providing access to the vessel as well as performing services to a Brazilian lessee – these rules introduce adverse consequences for entities both located in tax havens as well as subject to privileged tax regimes. These specific rules were not in discussion as part of the present decision.
In the present case, the taxpayer was a service provider, in the business of performing general engineering and construction services, including sub-aquatic and maritime engineering and construction services. Specifically, the service provider was to enter into a contract to provide engineering services (installation of sub-aquatic – transmission lines and ducts) to an entity holding a concession to exercise activities involving exploration, development and production of oil and natural gas. In order to perform the engineering services, it was necessary to have access to a specific type of foreign vessel – in this case, owned by an entity located in the US.
Pursuant to the regulations instituted by the National Waterway Transportation Agency or Agencia National de Transportes Aquaviários (ANTAQ), only entities classified as Brazilian navigation companies, or Empresa Brasileira de Navegação (EBN), may lease foreign vessels to navigate and provide maritime support. Neither the taxpayer nor the ultimate recipient of the services (concession holder) had such classification. As such, the service provider contracted a company classified as an EBN to lease the vessel. The arrangement under contemplation involved a tri-partite contract whereby although the EBN would be the lessee of the vessel, the payment would be made directly by the service provider to the beneficiary located in the US.
Broadly, the RFB considered that there were four requirements that should be satisfied in order to determine whether the reduced 0% rate should be applied to the remittance abroad in consideration for charter leasing of vessels:
The value of the remittance should correspond to the effective receipt of charter, freight, rental or leasing of foreign maritime and inland waterway vessels, arising in Brazil;
The charter, leasing, etc. should be made by companies and should be approved by the competent authorities;
The company remitting the amount (source payee) should be situated in Brazil; and
The beneficiary of the income cannot be resident or domiciled in a jurisdiction that the RFB considers a tax haven.
In applying the criteria to the specific case, as both the service provider and the EBN were situated in Brazil, the RFB concluded that the tri-partite arrangement had the effect of shifting the withholding tax requirement to the Brazilian service provider. Further, that there was no impediment or restriction in the service provider being entitled to benefit from the reduced rate of 0% withholding tax provided under the legislation, despite the fact that this entity was not (and could not be from a regulatory perspective) the actual lessee under the tri-partite agreement.
While a Solução de Consulta does not represent law or a legal precedent, it does provide further support and guidance for Brazilian entities in relation to how the RFB are treating such arrangements. The decision represents a welcome confirmation for Brazilian entities operating and providing services to the oil and gas industry (among others).