Brazil: Brazilian Federal Revenue Authorities issue Normative Instruction regulating the tax treatment of dividends, interest on net equity and the equity-pick up method
On September 18 2014, the Brazilian Federal Revenue Authorities (RFB) published Normative Instruction 1,492/2014 (NI1,492/2014) amending Normative Instruction 1,397/2013 (NI 1,397/2013), to regulate changes in respect of the tax treatment of dividends, interest on net equity (INE) and the equity pick-up method, that were introduced by Law No. 12.973/2014 in May 2014. By way of background, in 2007, Law No. 11.638/2007 amended the Brazilian accounting rules set out in Law No. 6404/1976 (the Brazilian Corporations Law) to align Brazilian generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS), effective from January 1 2008. To ensure that this accounting change was tax neutral, the Transitional Tax Regime (RTT) was introduced by Law No. 11.941/2009.
NI 1,397/2013 which was published in September 2013, provided guidance on the RTT and broadly speaking required taxpayers to maintain two sets of books, one for accounting purposes and another prepared in accordance with the pre-January 1 2008 accounting principles. NI 1,397/2013 also explained how certain differences between the two sets of books should be treated for tax purposes.
In November 2013, the executive branch of the Brazilian government published Provisional Measure 627/2013 (PM 627) which revoked the RTT and amended other aspects of the tax law. In May 2014, PM 627/2013 was converted into law by Law No. 12.973/2014.
NI 1,492/2014 amends NI 1,397/2013 to reflect the changes introduced by Law No. 12.973/2014, specifically:
Taxpayers that opt to apply the Law No. 12.973/2014 from January 1 2014, will be subject to the RTT until December 31 2013. For those taxpayers adopting the law from January 1 2015, they will be subject to the RTT until December 31 2014.
For the purposes of calculating INE, the method to be used for determining the annual profits and accumulated profits should be based on the pre-January 1 2008 accounting principles or alternatively based on the method adopted by the Law No. 6404/1976 as amended by Law 11.638/2007 (herein referred to as the new accounting standards). Where the taxpayer has elected to adopt Law No. 12.973/2014 from January 1 2014, it is required to calculate the limit in accordance with the new accounting standards.
The value of investments in subsidiaries and affiliates entities should be valued based on the methodology adopted under pre-January 1 2008 accounting principles. Where the taxpayer has elected to adopt Law No. 12.973/2014 from January 1 2014, it is required to calculate the value of investment in subsidiaries or affiliates in accordance with the value of net equity calculated pursuant to the new accounting standards. For the 2014 calendar year, where a taxpayer has not adopted the new law, but holds participation in an entity that has adopted the new law, the value of that investment should also be calculated pursuant to the new accounting standards.
Dividends calculated in excess of the pre-January 1 2008 accounting principles accruing between January 1 2008 and December 31 2013 are not subject to taxation. Excess profits accruing between January 1 2014 and December 31 2014 paid will be subject to withholding tax at 15% (or 25% where a foreign beneficiary is located in a tax haven). In the event that the recipient is a Brazilian entity the excess portion will be subject to corporate tax. Any withholding tax levied on the payment to a Brazilian resident should be creditable against the corporate tax due. Where the taxpayer has elected to adopt Law No. 12.973/2014 from January 1 2014 there should be no excess amount subject to withholding tax as the taxpayer should already be calculating dividends under the new accounting standards.
Philippe Jeffrey (firstname.lastname@example.org) and Mark Conomy (email@example.com)
PwC, São Paulo