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Brazil: Taxation of profits earned abroad by indirectly controlled or affiliate companies


Taxation in Brazil of profits earned by foreign controlled or affiliate companies is a highly controversial matter, explains Ana Lucia Marra of Machado Associados.

As per the rules currently in force, a Brazilian company that controls a company abroad or holds equity in an affiliate company in another country should include the profits earned by these foreign companies in the calculation basis of the corporate income tax (IRPJ) and the social contribution on net profits (CSLL) on December 31 of each year, even if no dividends were distributed or in any way made available to the Brazilian company and regardless of the nature of the activities that produced the profits.

Such a regime raises a number of questions, including whether the taxation of profits earned abroad on an accrual basis violates the Federal Constitution or not.

Additional questions exist when the corporate structure abroad involves two or more tiers. According to the regulations issued by the Federal Revenue Service, foreign directly controlled or affiliate companies (first tier) should consolidate the profits earned by companies in which they hold shares (second tier) for the purposes of the IRPJ and the CSLL.

Notwithstanding, in 2008, the Taxpayers’ Council (as the higher federal tax administrative court was known) decided, in a case generally referred to as the Eagle II case, that the concept of controlled company encompassed both direct and indirect control and, therefore, the profit earned by foreign indirectly controlled companies should be included in the calculation basis of the IRPJ and the CSLL, and not consolidated in the foreign directly controlled company. This decision was founded on the definition of controlled companies stated by the Corporation Law according to which a company may be directly or indirectly controlled.

Further, such decision concluded that the treaty to avoid double taxation to be considered should be the one entered by Brazil with the country in which the profits were earned, that is, the country in which the indirectly controlled company is located instead of the country of the directly controlled company.

The Taxpayers’ Council and the higher federal tax administrative court as it is known today, Administrative Council of Tax Appeals (CARF), have repeatedly adopted the position of the Eagle II case. Likewise, tax authorities have also based tax assessments on this position.

This position may lead to higher taxation, especially when any of the companies in the structure incurs losses that would reduce the taxable amount if the results of foreign indirectly controlled companies were consolidated in the foreign directly controlled company. In fact, when there are losses, the taxable amount determined according to the decision in Eagle II would be higher than the dividends that the foreign directly controlled company would be able to distribute to the Brazilian company.

In 2012, CARF took a different position on the matter for the first time. That decision considered that the foreign indirectly controlled company could not be taxed as if it was directly controlled because:

- The tax law does not expressly refer to indirectly controlled companies, nor to the disregard of the directly controlled companies to reach the profits of the indirectly controlled companies, and an interpretation in this sense without an express provision would not be acceptable; and

- The definition of the Corporation Law applies solely for the purposes set in such law, that is, the annual report of the corporation.

The final outcome of this matter is still uncertain.

It is important to note that the National Congress approved a Bill on September 11 2013 that establishes a programme for immediate payment or payment in installments of debts related to the levy on an accrual basis of the IRPJ and the CSLL on profits earned abroad, under which fines and interest for late payment are significantly reduced. The Bill is still subject to final approval by the President to enter into force. There is information that the government has been negotiating the settlement of these debts with representatives of major Brazilian companies, as well as new rules on the matter, and the consolidation of profits appears to be one of the issues to be solved.

Ana Lucia Marra ( is a member of the direct tax practice at Machado Associados, principal Corporate Tax correspondent for Brazil.

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