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Brazil: Brazilian steel giant wins appeal on taxation of indirectly controlled foreign corporations


Nélio B Weiss

Philippe Jeffrey

A large Brazilian long steel manufacturer has won an administrative-level tax appeal against the Brazilian Federal Revenue (SRF) involving the taxation of profits earned by indirectly controlled foreign corporations. In the yet unpublished decision, the Administrative Court of Federal Tax Appeals (Conselho Administrativo de Recursos Fiscais – CARF) held that the tax authorities had no legal basis on which to tax revenue generated by the foreign entities controlled indirectly through a Spanish holding company. The company underwent a major corporate restructuring in which it contributed shares in a range of its offshore investments to the capital of a Spanish holding company, based in Gran Canaria. This entity became subject to the special ETVE regime (Entidad de Tenencia de Valores Extranjeros), conceded by the Spanish tax authorities. Under this regime, revenues derived from controlled foreign corporations are not taxed in Spain. The Brazil-Spain Double Tax Treaty ensured that profits from the Spanish entity were not taxed in Brazil.

In its assessment, the tax authorities accused the group of using this new corporate structure for the sole purpose of avoiding tax, as the profits in question were not taxed at all. Further, the authorities alleged that the holding company lacked economic substance as it supposedly had no staff and all strategic decisions were taken in Brazil, serving as a mere channel through which profits were transferred tax-free to Brazil. Moreover, the authorities argued that revenue regulations provide that profits earned by foreign controlled entities must be taxed in Brazil at year-end and should further be read in light of Brazilian corporate law, which includes both directly and indirectly controlled entities in its definition of "controlled entities".

The company's defence contended that the Spanish entity had autonomy in carrying out its activities, managed the group's international operations and with its profits made international acquisitions, thus showing economic substance. Further, the company defended its restructuring by alleging that tax planning is not forbidden by Brazilian law.

In their decision, the counselors held in favour of the taxpayer, stating that no legal basis exists that would allow the disregard of treaty provisions, which must take precedence over national law and regulations. Further, the Spanish entity was held to possess economic substance, as it could be demonstrated that it carried out its activities as a holding company and could not be said to have been constituted solely for the purposes of tax avoidance. With regards to the interpretation of "controlled entity" under corporate law, the counselors decided that although it does include indirectly controlled entities in the scope of a controlled entity, an interpretation of what constitutes a controlled entity based on corporate law should only be used in its own context and not expanded for tax purposes.

This decision on controlled entity taxation in favour of taxpayers has come after a relatively recent wave of unfavorable ones. Although it has not yet been published, it is sure to cause significant debate in the near future and may mark a permanent change in understanding of the matter by the administrative tax courts.

Nélio B Weiss ( and Philippe Jeffrey (


Tel: +55 11 3674 2271


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