Brazil: Brazilian revenue authorities release provision for treating certain Swiss regimes as privileged tax regimes
On June 20 2014, the Brazilian federal Revenue authorities issued Normative Instruction No 1,474/2014 (NI 1,474), providing that certain Swiss tax regimes should be considered 'privileged tax regimes' for Brazilian tax purposes. Further, it removes the Hungarian offshore low-tax company (KFT) regime from its list of privileged tax regimes. NI 1,474 is applicable from January 1 2014. When Brazilian taxpayers deal with parties subject to a privileged tax regime, some important considerations include the application of more restrictive transfer pricing rules that must be applied regardless of whether the foreign party is related to the Brazilian entity, as well as more restrictive thin capitalisation rules.
NI 1,474 amends Normative Instruction No. 1,037/2010 (NI 1,037) which set out a list of tax havens and privileged tax regimes for Brazilian tax purposes. Specifically, in relation to Switzerland, NI 1,474 provides that the following regimes should be considered as privileged tax regimes:
Regimes applicable to a Swiss entity incorporated as a holding company, domiciliary company, auxiliary company, mixed company and/or administrative company whose tax treatment results in a corporate income tax rate of lower than 20% (on a combined basis) under federal, cantonal and municipal legislation; and
Regimes applicable to other entities whose tax treatment, as a result of the application of rulings issued by local tax authorities, results in a corporate income tax rate of lower than 20% (on a combined basis), under federal, cantonal and municipal legislation.
Switzerland was originally considered a tax haven jurisdiction for Brazilian tax purposes on the black-list detailed in NI 1,037. Its inclusion in the black-list was then suspended and, as a result of NI 1,474 has now been cancelled. Therefore, while Switzerland may not be considered a tax haven jurisdiction, it is still necessary to consider whether the particular regime applicable to the Swiss entity falls within the definition of privileged tax regime.
Modification to the Brazilian tax on financial operations (IOF)
On June 4 2014, Decree nº 8,263 was published, reducing the minimum average term for foreign loans subject to the tax on financial operations (IOF) at 6% from 360 days to 180 days. Under the new rule, the 0% IOF rate is now applicable to foreign loans contracted as of June 4 2014 with minimum average term of greater than 180 days.
Following the Brazilian government increasing the IOF rate levied for foreign loan transactions in March 2011 from 5.38% to 6% and raising the minimum average term from 90 days to 360 days, the authorities have used the tax as a means of controlling speculative short-term investments in Brazil (the minimum average term to apply the 0% rate going as high as 1800 days in early 2012). The new rules are intended to encourage Brazilian companies to obtain loans from abroad and to mitigate the effects of foreign exchange swings between the Brazilian Real and the US Dollar.
It is important to note that where IOF applies to the foreign loan, the 6% rate will apply to the full loan principal when the funds enter Brazil and are exchanged into Brazilian Reais. Further, foreign loans with an initial term of more than 180 days will still be subject to the 6% IOF rate where the loan is repaid within the 180 day period.