Brazil: Brazil updates tax haven and privileged tax regime lists
Brazilian tax authorities (RFB) issued Normative Instruction 1,658/2016 (NI 1,658) that includes Ireland in the list of tax havens (the black list) and also adds the regime applicable to Austrian holding companies to the list of privileged tax regimes (the grey list).
NI 1,658, which was published on September 14 2016, is effective as of October 1 2016.
Furthermore, NI 1,658 has adjusted the black list by replacing the Dutch Antilles for Curaçao and Saint Martin, and deleting St. Kitts and Nevis, which was duplicated in the previous NI, keeping the country listed only under its native Portuguese name, São Cristóvão e Nevis.
These changes, together with the application of the Brazilian controlled foreign corporation, transfer pricing, thin capitalisation, and stricter deductibility rules, as well as higher withholding tax rates on payments to black-listed jurisdictions, among others, may have significant impacts on international structures involving Brazilian entities and the jurisdictions mentioned above (i.e. Austria, Ireland, the Netherlands and Denmark).
The grey list
The grey list, which has been subject to several changes over the past few years, also considers Dutch and Danish holding regimes as privileged tax regimes, but only for those specific countries where the holding entities do not carry out significant economic activities.
In this regard, NI 1,658 in general terms confirms the RFB's initial understanding on what should be viewed as 'significant economic activities' – previously shared by the RFB through public consultation No 007/2016 released in May 2016.
According to NI 1,658, a foreign holding company is deemed to carry out significant economic activities if it has, in its country of domicile, operating capacity to manage and make decisions regarding:
Activities with the purpose of generating income from its assets; or
Management of equity interests with the purpose of generating income in the form of profit distributions and capital gains.
Operating capacity would be measured by:
The existence of physical facilities; and
Qualified employees to manage and make decisions according to the complexity of the tasks to be performed.
It is important to note that the concept of significant economic activities is applicable only to the Dutch and Danish holding regimes, and not to the Austrian holding regime. The latter is regarded as a privileged tax regime regardless of whether significant economic activities are carried out.
Multinationals are encouraged to analyse how these changes may affect their specific structures.
New opportunities available through Brazilian private equity investment funds
The Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários – CVM) issued Normative Instruction (NI) 578 on August 30 2016, providing new regulatory rules for Brazilian private equity investment funds (Fundo de Investimento em Participações – FIPs).
Unlike direct investments, FIPs are able to provide a much more efficient tax treatment, both when remunerating investors and when such investors exit the structure (to the extent that certain requirements are met). However, the regulations for the FIPs were outdated and NI 578 was released after a public consultation to implement the desired changes. NI 578 repeals the previous NI 391/03 for FIPs.
Among the changes introduced by the new NI, there is now a possibility for certain FIPs to invest in Brazilian limited liability companies, which is the corporate form elected by most of the companies in Brazil due to its simplicity and lower bureaucracy. Start-ups and other similar initiatives are often incorporated as limited liability companies, and can now also have access to financing through FIPs, a resource that was only available to corporations in the past.
However, it is important to note that the possibility for the FIP to invest in limited liability companies is subject to certain governance requirements, which may vary according to the total annual gross revenue of the limited liability company itself. Only certain categories of a FIP, as per the NI, are authorised to invest in limited liability companies.
Another change that also mirrors the requests from the market and investors relates to the possibility of holding foreign investments. FIPs are now allowed to invest abroad, up to 20% of their total assets for any FIP or, alternatively, up to 100% of its assets, as long as this FIP is classified under a particular category labelled "Multi-strategy" and also contains the expression "Investment Abroad" in its denomination.
The NI introduces further changes such as the possibility of the FIP to invest in debentures (non-convertible debentures) up to 33% of the subscribed capital, as well as the possibility of advances for future capital increases in invested companies.
The update to the FIP regulations is a welcome change. Multinationals are encouraged to analyse how this change may bring additional investment opportunities.