International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Brazil income tax reform: International tax strategies reassessment

Sponsored by

sponsored-firm-vrbf-advogados.png
There maybe modifications of income tax legislation

Paulo Victor Vieira da Rocha and Custódio Moreira Brasileiro Silva of VRBF Advogados share insights on the impact of income tax reform for international tax planning regarding Brazilian companies' cross-border dividend distribution taxation.

The Brazilian Tax Law is under review. For now, the Brazilian National Congress is discussing some important constitutional amendments and law projects on two fronts: 

  • Unification of the existing consumption related taxes, possibly in the form of a comprehensive and simplified VAT; and

  • The income tax reform, a set of nuclear legal modifications that can imply some structural changes in the Brazilian tax system. 

Local political analysts dare to say that this a rehearsal for a more general and restructuring tax reform to come.

All these changes give rise to multiple discussions from different perspectives. This article will focus on the need to replan international tax structures in view of the possible modifications of income tax legislation in Brazil, come they true.

These legislative projects are under an intense legislative debate and, for this reason, the scope of our analysis is limited to the currently prevailing qualitative trends, as insights for future tax strategies reformulations. Specific focus is given to profits and dividends distributions taxation policy.

Brazilian current dividends distribution policy

Since 1996, Brazil has adopted the position of not taxing dividends paid from resident companies to their shareholders, be them residents in Brazil or not. It is important to remark that dividends received from non-resident companies are taxable in Brazil. This policy represented a two-fold impact. From one side, this has been appointed as a reason to a more elevated tax rate on corporate profits, since the dividends would not be taxed.

From the other, this reduced the importance of double taxation treaties (DTT), at least from the perspective of dividends distributed by Brazilian resident companies. Since there cannot be double taxation on such dividends, if they are not taxed in Brazil.

An important exception could be found in those treaties in which matching credit or tax sparing clauses were available – which granted a tax credit for non-resident shareholders, even if there was no taxation of the dividends in Brazil. This represented a tax benefit, leading to a lesser income tax burden. But those clauses have become rarer in more recent treaties, available only in older ones.

With this policy of taxing predominantly profits in detriment of dividends has made Brazil less susceptible to taxing rights attributions in DTT’s, since profits are in general taxed only at the source, but dividends taxing rights come with limitations. From the taxpayer perspective, the DTTs were less effective or attractive in this regard.

New proposed policy and the impact on tax planning strategies

One of the most important pillars of the current income taxation reform proposal is the return of dividends taxation. The current version of the Legislative Project stipulates a tax withholding of 20% when the dividends are paid to a non-resident, increasing to 30% if paid to a resident of a state deemed to be a tax haven or with a privileged tax regime.

The consequent impact would be the opposite of those of the current policy. Firstly, as for dividends distribution, double tax treaties would become more important for obtaining tax efficiency when receiving dividends from Brazil, probably demanding replanning of ownership structures for Brazilian companies shares and participations. 

Secondly, the reduction of corporate income tax on profits, allied with the potential limitation of dividends taxation foreseen by DTTs, may result, depending also on the domestic rate approved for profits taxation, in overall income tax reduction paid in Brazil. However, this result will depend on some strategic tax planning.

It should be highlighted that in view of the new patterns of anti-avoidance rules adopted domestically or in DTTs, this planning needs solid ground. Tax authorities in Brazil are tending ever more, following international trends, to disregard legal structures or transactions for which an economic justification other than the tax reduction is lacking.

This policy appears even on recent DTTs in the form of, for instance, the  principal purpose test (PPT). PPT is present in the Brazil–Argentina DTT, after a protocol ratification in 2017, and in more recent DTTs signed by Brazil with Switzerland, Singapore, and United Arab Emirates. The notion of principal purpose or objective, however, is yet to be found in older ones. (Schoueri and Moreira; Abuso dos Acordos de Bitributação e Teste do Objetivo Principal; 2019)

As a result, a robust tax planning cannot be made in the spur of the moment, it must be integrated in the overall business strategy of every company and it should be considered even at the business model conception and subsequent re-adaptations. 

Besides that, such re-adaptation and reassessment of the business strategy should be dynamic, continuous and flexible, given the perspective that legislative reforms and policies alterations shall be much more frequent, considering the pace of the own social changes in a digital world.

 

Paulo Victor Vieira da Rocha

Partner, VRBF Advogados

E: paulo.vieiradarocha@vrbf.com.br


Custódio Moreira Brasileiro Silva

Associate, VRBF Advogados

E: custodio.brasileiro@vrbf.com.br


more across site & bottom lb ros

More from across our site

Lawmakers have up to 120 days to decide the future of Brazil’s unique transfer pricing rules, but many taxpayers are wary of radical change.
Shell reports profits of £32.2 billion, prompting calls for higher taxes on energy companies, while the IMF has warned Australia to raise taxes to sustain public spending.
Governments now have the final OECD guidance on how to implement the 15% global minimum corporate tax rate.
The Indian company, which is contesting the bill, has a family connection to UK Prime Minister Rishi Sunak – whose government has just been hit by a tax scandal.
Developments included calls for tax reform in Malaysia and the US, concerns about the level of the VAT threshold in the UK, Ukraine’s preparations for EU accession, and more.
A steady stream of countries has announced steps towards implementing pillar two, but Korea has got there first. Ralph Cunningham finds out what tax executives should do next.
The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.
Industry groups are concerned about the shift away from the ALP towards formulary apportionment as part of a common consolidated corporate tax base across the EU.
The former tax official in Italy will take up her post in April.