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Brazil: Tax authorities issue new rules regarding the Transitional Tax Regime: portion of dividends may now be taxable



Philippe Jeffrey

Gustavo Carmona

The Brazilian Revenue Service (RFB) issued Normative Instruction (IN) No. 1.397 on September 16 2013, providing new regulations with regards to the Transitional Tax Regime (RTT), which may render a portion of dividends paid to a non-resident beneficiary subject to withholding income tax. The RTT was introduced to guarantee fiscal neutrality in view of the new accounting practices established by Law No. 11.638/2007 (which sought to bring Brazilian accounting rules to IFRS standards). The RTT provides that no adverse tax consequences should be triggered from the adoption of the new accounting criteria in relation to the recognition of revenues, costs and expenses computed on the assessment of net profits.

The divergence between the new accounting practices and the tax rules has generated significant discussions with respect to the use of a specific balance sheet for purposes of tax computation, different from the corporate balance sheet based on the new Brazilian GAAP. Although Brazilian legislation does not expressly provide for the use of a tax balance sheet, Brazilian tax authorities have consistently expressed their opinion in the sense that it could be used for thin capitalisation, dividends and interest on net equity (INE) calculations.

In view of this, IN 1.397 now confirms this understanding and states that, among others, for the purposes of assessment of tax exempt distributable dividends and deductible INE expenses, the equity balances to be considered are the ones based on the accounting practices in force up to December 31 2007. As such, the portion of dividends paid to a non-resident beneficiary that exceeds the profits calculated under the tax balance sheet would be subject to a 15% withholding income tax (this rate is increased to 25% if the beneficiary is resident in a jurisdiction considered as a tax haven for Brazilian tax purposes). Further, the portion of INE paid exceeding the tax balance sheet would no longer be deductible for income tax purposes.

Accordingly, taxpayers were left with the understanding that two separate balance sheets would be required, that is, one for tax and another for corporate purposes. Further, the text of the IN could lead to the understanding that the taxation of dividend payments exceeding the tax balance sheet could be retroactive, given the fact that Normative Instructions are interpretations of legislation and as such may have retroactive effect.

Given the repercussions and the relative turmoil created in the market as a result of these new rules, there have been indications that the RFB is considering a revocation of the IN, or at least amendments to the text, stating that taxpayers would not be required to keep two separate balance sheets.

Philippe Jeffrey (


Tel: +55 11 3674 2271

Gustavo Carmona (


Tel: +55 11 3674 3745

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