A Q&A guide to tax on corporate transactions in Brazil. This Q&A provides a high level overview of tax in Brazil and looks at key practical issues including, for example, the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.
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This Q&A is part of the PLC multi-jurisdictional guide to tax. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactionshandbook.
Brazil is a Federative Republic and the authority to tax is shared between (IBGE, at www.ibge.gov.br/cidadesat/topwindow.htm?1):
The Union.
26 states.
The Federal District.
5,564 municipalities.
The Federal Revenue Service (www.receita.fazenda.gov.br), which reports to the Minister of Finance, is the main authority responsible for enforcing federal taxes and social contributions. The Federal Revenue Service has a number of different contact points and provides online assistance, depending on the nature of the enquiry. For personal assistance, a taxpayer usually consults with the agency with relevant geographical jurisdiction.
The main authorities responsible for enforcing state taxes and municipal taxes are the relevant state treasury and municipal finance secretariats.
Taxpayers can request rulings to clarify the tax classification of products and application of tax law, according to the procedures set out in federal, state, federal district and municipal legislation.
Under federal legislation, a ruling request filed by taxpayers is only accepted if they are not subject to a tax audit to investigate the subject of the ruling. These requests can also be filed by associations who represent professional or economic sectors.
A ruling request filed before the tax maturity date generally suspends payment of the amount in dispute, and/or the application of delayed fines and interest, from the date of its submission up to the 30th day following the date on which the applicant is notified of the decision. If the answer to the request results in tax payable, the tax must be paid within 30 days from notification of the decision.
A ruling only binds the applicant who has requested it (or the professionals or companies represented by the applicant). If the tax authorities review an opinion in a ruling, the new opinion does not apply to tax triggering events occurring before its publication in the Official Gazette) (Diário Oficial da União (DOU), or before the applicant is notified of the new opinion, except for the possible retrospective application of the new opinion if it benefits the applicant.
In other cases, a ruling request is ineffective if it relates to one of the following:
A theoretical subject.
A fact under administrative or judicial litigation filed by the person filing the request.
A subject addressed in other normative rules (published in the Official Gazette before submission of the ruling request).
The unconstitutional nature or illegality of tax legislation.
A situation defined or declared in a legal provision.
A fact described as a crime or contravention.
The effects of the ruling request are terminated if a normative act is published after the filing of the request, but before its resolution. An appeal can be lodged with suspending effects against the ruling, if there are conflicting precedents on the same subject.
The federal legislation allows ruling requests for a situation that will occur in the future, or which is expected. Theoretically, this alternative could be explored to obtain a pre-transaction ruling or clearance for a proposed transaction. However, this is not usual or time tested.
In practice, the ruling procedure is only used in simpler cases concerning applicable tax legislation because:
It is time consuming.
Contradictory decisions about the same matter can be found.
Taxpayers have not frequently obtained favourable decisions.
In addition to this general ruling procedure, there is a specific procedure for requests related to:
Changes of predetermined profit margins used to calculate transfer pricing benchmarks.
Changes of the percentage used to define the safe harbour that releases taxpayers from calculating export benchmarks, for transfer pricing purposes, if the average export price is lower than 90% of the average price of the same assets, goods, services, or rights sold in the Brazilian market to unrelated parties, during the same period and under similar payment conditions.
The procedure for this type of request is also bureaucratic, and:
Requires a large disclosure of sensitive information.
Is not time tested.
In practice has not worked as an advance price agreement.
It is also possible to obtain informal guidance at the Federal Revenue Service specialised units. However, this guidance is not binding and is commonly used to clarify non-complex issues.
Its key characteristics.
What triggers it.
Who is liable.
The applicable rate(s).
Corporate transactions are not generally subject to transfer taxes, except for limited cases where the following taxes could apply:
Gift and inheritance tax (Imposto de Transmissão causa Mortis e Doação) (ITCMD). This is charged by states on gifts and inheritance of tangible or intangible assets and rights (including rights over such assets).
Inter-vivos transfer tax (Imposto sobre Transmissão de Bens Imoveis ) (ITBI). This is charged by municipalities on the onerous transfer of real estate and rights over real estate, except for guarantee rights over real estate. The transfer of assets to Brazilian legal entities in payment for capital subscriptions or resulting from amalgamations, mergers and spin-offs is excluded from this tax, except if the main activity of the acquirer is the purchase and sale, rent or lease of real estate and rights over real estate.
Corporate resolutions are generally executed by Brazilian legal entities' shareholders or quotaholders, managers and/or lawyers, and filed with the competent commercial registry. The costs of these filings are not material (publication costs may be relevant on a case-by-case basis).
Formalisation and/or filing of private instruments with Brazilian notaries is not generally required. However in certain cases this is done to ensure validity, notification and/or enforcement against third parties of documents such as real estate deeds, pledges, mortgages, and personal guarantees.
Foreign documents and their sworn translations must be filed with Brazilian notaries to be enforceable before government offices and local courts, although this requirement has been relaxed on a case-by-case basis. Notary fees vary by state or federal district, and are often charged based on the transaction value.
Its key characteristics.
What triggers it.
Who is liable.
The applicable rate(s).
Corporate income tax (Imposto de Renda de Pessoa Juridica) (IRPJ) and social contribution on net profits (Contribuição Social sobre o Lucro Líquido) (CSLL) are federal taxes levied on the taxable profits of Brazilian legal entities (and individuals or entities assimilated to Brazilian legal entities, under tax law) at the following rates:
IRPJ: 15% plus a 10% surcharge on taxable profits exceeding BRL20,000 per month, or BRL240,000 per year (as at 1 March 2011, US$1 was about BRL1.7).
CSLL: 9% (15% for financial institutions, which are not the focus of this chapter).
IRPJ and CSLL are charged on worldwide income, and specific rules apply for the taxation of income earned overseas. In particular, profits arising from investments in foreign branches, controlled or affiliated companies, are taxed on 31 December of each calendar year irrespective of distribution, and losses accrued overseas cannot be deducted from profits accrued in Brazil.
Tax incentives and exemptions apply in strict cases (for example, IRPJ reductions granted to enterprises in the north or north-east and IRPJ exemptions granted to educational activities, if certain requirements are met).
There are three main methods to calculate profits taxable with IRPJ and CSLL:
Actual profit.
Deemed profit.
Arbitrated profit.
Actual profit. This is generally used by large taxpayers, and is mandatory in certain cases, such as:
Legal entities whose total revenues exceeded BRL48 million in the previous calendar year.
Legal entities who have foreign branches, foreign subsidiaries or foreign affiliates, as defined by Brazilian tax law, or earn revenues from transactions performed overseas (the mere export of goods and services does not lead to the mandatory application of actual profit).
Legal entities who enjoy certain tax benefits.
Under the actual profit method, the IRPJ and CSLL are calculated quarterly (quarterly actual profit) or annually (annual actual profit).
The tax bases are the pre-tax accounting profits (accrued in Brazil or overseas, including capital gains), adjusted by additions and exclusions set out by the IRPJ and CSLL legislation, and reduced by accrued tax losses. Effective, necessary and normal expenses for the performance of the legal entity's activities and maintenance of its production sources are generally tax deductible. Tax deductibility restrictions apply in certain cases, for example:
Royalties for trade marks, patents and transfer of know-how.
Accounting provisions.
Payments of interest subject to thin capitalisation rules.
Costs and expenses arising from transactions with parties domiciled in low tax jurisdictions or carried out under privileged tax regimes (see below).
Tax losses can be carried forward and no statute of limitations applies for this purpose (carry-backs are not allowed). However, tax losses cannot reduce the taxable profits by more than 30%.
Non-operating tax losses (for example, resulting from the sale of fixed assets) can only be offset against profits of the same nature, except in the tax base period when the non-operating tax losses accrue (such losses also cannot reduce taxable profits by more than 30%).
Tax losses are forfeited in either of the following situations:
A merger (tax losses of the merged company cannot be offset against taxable profits accrued by the surviving company).
If a concurrent change in a company's corporate control and business field occurs, between the date when the tax losses accrue and the date when the tax losses are deducted from taxable profits.
If taxpayers opt for the annual actual profit method, monthly prepayments of tax are required, based on either:
Percentages of gross revenues per activity, plus other taxable income (the same criteria mainly apply as for calculating deemed profits, see below, Deemed profit).
Accounting profits shown in intermediary balance sheets, adjusted for tax purposes.
Deemed profit. Under this method, IRPJ and CSLL are calculated quarterly on the sum of:
Certain percentages of the legal entity's gross revenues from sales of goods and services.
Other taxable income (for example, capital gains and financial income).
These percentages may vary per type of revenue and tax. For example:
The applicable percentage over gross revenues derived from the provision of services is 32%, when calculating IRPJ and CSLL.
The applicable percentages over gross revenues derived from sales of goods are 8% when calculating the IRPJ, and 12% when calculating the CSLL.
Deductions from taxable profits and offsetting of tax losses are not allowed under the deemed profit method, but taxable profits can be calculated on an accrual or accounting cash basis, at the taxpayer's option.
Arbitrated profit. This is generally used by the tax authorities when, for example, the taxpayer fails to make a valid option for deemed profit and/or their accounting and other available documents are inappropriate for calculating IRPJ and CSLL based on actual profit. However, the method may be adopted by companies in specific cases.
The calculation of IRPJ and CSLL based on arbitrated profit is similar to deemed profit (see above, Deemed profit), but the percentages applied to the taxpayer's gross revenues from sales of goods and services are 20% higher for IRPJ purposes.
It is important to note that, as from the publication of Law 11638/07, Brazilian accounting rules have been harmonised with international standards used in main capital markets (International Financial Reporting Standards (IFRS)).
To protect taxpayers from adverse tax impacts arising from the adoption of the new accounting standards, a transitory tax regime (regime tributário de transição) (RTT) was approved by Executive Measure 449/08, later converted into Law 11941, pursuant to which, the adoption of the new accounting standards should generally be neutral for the purposes of calculating IRPJ, CSLL, and the social contributions levied on Brazilian legal entities gross revenues (see below, Social security contributions). Due to the RTT, IRPJ, CSLL, the contributions for the Social Integration Programme (Programa de Integração Social (PIS) and Social Security Funding (Contribuição para o Financiamento da Seguridade Social) (COFINS) are calculated based on accounting rules in force at 31 December 2007.
Transfer pricing rules apply to the following transactions, when carried out with related parties, parties domiciled in low-tax jurisdictions, or under a privileged tax regime:
Acquisitions or imports of assets, goods, services and rights.
Exports of assets, goods, services and rights.
Interest revenues or interest expenses arising from transactions not registered with the Central Bank.
Costs and expenses exceeding the corresponding benchmark are not tax deductible, or are added to the profits taxable with the IRPJ and CSLL, and revenue shortages related to the benchmark are added to the IRPJ and CSLL tax bases.
Brazilian tax law adopts a mathematical approach when describing the methods to calculate transfer pricing benchmarks. Although the domestic transfer pricing rules are inspired by the Organisation for Economic Co-operation and Development (OECD) guidelines, there are differences which must be considered.
Transfer pricing rules do not apply to domestic transactions, which fall under the scope of the disguised distribution of profit rules, royalties and the remuneration for the transfer of technological know-how. Safe harbours apply mainly to exports.
The concept of related parties is broader than the concept of associated enterprises used by the OECD, and includes not only transactions between a legal entity and its branches, headquarters, controlled companies, controlling shareholders and their relatives (if the controlling shareholders are individuals), managers and their relatives, but also transactions with (among others):
Affiliated companies, as defined by Law 6404/76 (Corporation Law).
Companies that participate with a legal entity in a joint enterprise, under a consortium or condominium, as defined by Brazilian law.
Foreign legal entities that grant to the Brazilian legal entity (as their agent, distributor or dealer) exclusive rights to buy or sell assets, goods, services or rights.
Foreign agents, distributors or dealers of a Brazilian legal entity, to whom the Brazilian legal entity has granted exclusive rights to buy or sell assets, goods, services or rights.
Low-tax jurisdictions are those that either:
Do not allow access in its legislation to information about the shareholding structure of legal entities, their ownership, or the identity of the beneficial owner of income earned by non-residents.
Do not tax income or tax income at maximum rates lower than 20%, considering the tax legislation applicable to individuals or legal entities, according to the nature of the person with whom the relevant transaction is performed, and tax on the work and on the capital.
A privileged tax regime is one that meets one or more of the following requirements:
Does not tax income, or taxes income at maximum rates lower than 20%.
Provides tax advantages to non-residents (individuals or legal entities) conditional on non-performance of substantial economic activities in the jurisdiction, or without requiring performance of substantial economic activities in the jurisdiction.
Does not tax income earned outside the relevant territory, or taxes this income at maximum rates lower than 20%.
Does not allow access to information about the shareholding structure of legal entities, ownership of assets and rights or economic transactions performed.
The Federal Revenue Service has issued a blacklist of low-tax jurisdictions and privileged tax regimes (Normative Instruction 1037/10). There are disputes as to whether this blacklist is exhaustive.
A simplified regime for paying IRPJ, CSLL and other taxes applies to small companies, with exceptions, in limited cases. This is not covered in this chapter.
Contributions to PIS and to COFINS are social security contributions, charged by the Union to legal entities on:
Gross revenues (certain deductions and exemptions apply on a case-by-case basis).
Imports of goods and services.
There are two methods of calculating PIS and COFINS:
Cumulative method.
Non-cumulative method.
Brazilian legal entities that pay corporate taxes (IRPJ and CSLL) based on deemed profit (see above, Corporate taxes: Deemed profit) generally calculate the PIS and COFINS based on the cumulative method. In this case:
The tax bases are limited to the gross revenues from sales of goods and services (with certain deductions).
PIS and COFINS rates are 0.65% and 3%, respectively.
Taxpayers are not entitled to tax credits.
Legal entities that pay corporate taxes based on actual profit (see above, Corporate taxes: Actual profit) calculate the PIS and COFINS based on the non-cumulative method. In this case:
The tax bases are the gross revenues in general (with certain deductions and except for certain revenues excluded from the tax or benefited from tax cuts).
PIS and COFINS rates are higher: generally 1.65% and 7.6% respectively.
Taxpayers are entitled to certain tax credits, generally corresponding to the rate of each contribution on the value of certain costs/expenses, particularly the costs or expenses of:
acquiring fixed assets for rent or use in producing goods for sale or providing services;
goods purchased for resale;
goods purchased and services hired for use as inputs in the provision of services and/or manufacturing or production of goods for sale;
electric energy used in the taxpayer's establishments;
rent or lease of buildings, machines and equipment used for the taxpayer's activities.
Financial revenues are either not taxed (cumulative method) or benefit from a 0% PIS and COFINS rate (non-cumulative method). Exports of goods and services are not taxed, irrespective of the method chosen, but for services, the PIS and COFINS exemption only applies if the export revenues are cashed into Brazil or kept overseas in accordance with Brazilian exchange control rules. In certain cases, the cumulative method is mandatory, for example:
Revenues derived from civil construction activities until 2015.
Revenues derived from call centres and telemarketing.
Activities from software development, licensing, programming and related support, except for imported software.
If a company has activities or revenues subject to the cumulative and non-cumulative systems, PIS and COFINS tax credits can be used proportionally to the share of revenues subject to the non-cumulative system in the total revenues. Specific rules apply to certain industries (or certain revenues), such as:
Financial institutions.
Pharmaceutical, automotive, beverage, and tobacco industries.
The fuel industry.
Hygiene products and cosmetics industries.
In addition, certain industries are subject to:
Tax centralisation rules (for example, the automobile industry), by which PIS or COFINS are only charged once, to a chosen person in the relevant market chain.
Tax substitution rules (for example, the motorcycle industry), by which a person appointed by law is liable to calculate and collect PIS or COFINS due from other persons, on past or future transactions (for future transactions based on estimated prices).
The tax centralisation and tax substitution rules aim to charge or collect PIS and COFINS from the largest taxpayers in certain market chains, to stop informality in some levels of those market chains.
For example, in the automobile industry, PIS and COFINS taxation is charged solely on importers or manufacturers of the vehicles. In the motorcycle industry, importers and manufacturers are liable not only for their own contributions, but also for calculating and collecting the contribution due from retailers of these goods.
PIS and COFINS are complex and highly regulated taxes and represent a significant share of overall Brazilian tax revenue. Disputes are frequent in this field, particularly relating to tax credits.
Withholding of IRPJ, CSLL, PIS and COFINS (among others) is required on:
Payments between private legal entities for the provision of certain professional services.
Payments by the public administration to private legal entities for the supply of goods and services.
These withholdings are prepayments and are offset against the tax due.
Its key characteristics.
What triggers it.
Who is liable.
The applicable rate(s).
Imposto sobre Produtos Industrializados (IPI) is charged for:
Imports of industrialised goods (the tax is charged on the importers).
Circulation in the domestic market of goods imported.
Circulation in the domestic market of goods manufactured by Brazilian industrialists and certain wholesalers and retailers that are deemed as industrialists, as defined by legislation.
The tax base on imports is the CIF price (import price in compliance with customs valuation rules, plus insurance and freight charged for delivery of the goods at the Brazilian frontier), plus import tax (Imposto de Importacio) (II). The tax base on the circulation of goods in the domestic market is the value of the relevant transaction, as defined by legislation.
IPI rates vary according to the necessity of the relevant good (for example, items in the basic food basket benefit from 0% rates) and their classification under the IPI Table of Rates (Tabela de Incidência do IPI) (TIPI). IPI rates range from 0% to 330% (average rates range from 10% to 15%). The tax is calculated periodically, generally by offsetting:
Credits for the IPI paid on imports of goods for resale or industrialisation and for the IPI levied on the price of production inputs purchased in the domestic market.
Debits from taxable transactions.
Exports are exempt from IPI, but taxpayers are entitled to keep tax credits for goods imported or purchased locally and exported or used in producing exported products.
Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de Transporte Interestadual e Intermunicipal e de Comunicação (ICMS) is a state tax levied on:
Imports of goods.
Domestic circulation of goods.
Inter-municipal or interstate transport services.
Communication services, including services originating from abroad.
Taxpayers are:
Importers.
Commercial establishments that promote the circulation of goods in the domestic market (and persons assimilated to those establishments due to their activities).
Providers of the taxable services.
The liability to pay the tax may be transferred to a third party connected with the tax triggering event. Generally, the tax bases are:
On imports of goods: the CIF price, plus II, IPI, PIS and COFINS, ICMS (which must be included in its own tax base) and customs expenses incurred until clearance of the goods from customs.
On circulation of goods: the value of the relevant transaction, as provided by legislation (IPI must be included in the ICMS tax base on transactions with end customers).
On transport and communication services: remuneration charged by the service provider, plus ICMS (which must be included in its own tax base).
Interstate rates for transactions involving ICMS taxpayers are defined by senate resolutions. Currently, these rates are 7% and 12% (the lower rate applies if the origin of the taxable transaction is a state in the south or south-east and the destination is Espírito Santo or a state in the north or north-east and the 12% rate applies to other cases). Otherwise, ICMS rates may vary depending on the state, the taxable transaction, the parties and the place where the taxpayers have their business establishments.
Generally, the applicable rates in São Paulo are:
18% on imports of goods from taxpayers located in this state, circulation of goods within this state, and interstate transactions with goods, if the recipient is not an ICMS taxpayer.
25% on communication services.
12% on transport services.
The overall ICMS burden is the same, irrespective of where the goods are produced or where the services are performed. Specific rules apply to ensure this principle, for example in interstate transactions involving ICMS taxpayers with fixed assets and goods for own consumption.
The tax is generally calculated periodically by offsetting:
Credits for the ICMS paid on imports and levied on the price of domestic purchases (specific rules or restrictions on tax credits may apply in certain cases).
Debits for the taxable transactions.
Exports are not taxed, but the right to tax credits is maintained. In some cases, ICMS tax substitution rules apply (that is, the collection of the ICMS is centralised in certain participants in the supply chain, who calculate and pay the tax due in former or subsequent transactions with the relevant good). ICMS incentives and benefits can only be granted if approved by all states, to avoid tax disputes. However, disputes between the states concerning the breach of this rule are frequent.
Tax triggering events for IPI and ICMS are linked to the shipment of taxable goods from one place to another, mainly arising from their sale or disposition, but taxation is not limited to these cases. Services not mentioned above are taxable with the municipal service tax (Imposto sobre Serviços) (ISS), which is not a value added tax (see Question 6).
Conflicts between the Union, states and municipalities about the right to charge indirect taxes may arise in certain cases. For example, there are disputes between the states and municipalities to tax turn-key agreements for the supply and manufacture of industrial equipment, particularly complex agreements concerning construction work.
IPI and the non-cumulative PIS and COFINS (see Question 4) could also be considered as value added taxes.
Brazilian value added taxes are complex and must be analysed carefully by parties interested in doing business in Brazil.
Its key characteristics.
What triggers it.
Who is liable.
The applicable rate(s).
Several other taxes can be triggered on corporate transactions, such as the following.
Imposto de Renda Retido na Fonte (IRRF) is a federal tax levied, among other cases, on the income earned by non-residents from Brazilian sources, who are responsible for calculating and withholding the tax. The applicable rates are generally 25% or 15%, except for a lower rate provided under a Brazilian double tax treaty. The 25% rate applies to services that do not qualify as technical services, and generally to payments to beneficiaries domiciled in low-tax jurisdictions. This tax also applies to capital gains earned by non-residents from the disposition of Brazilian assets, regardless of certain debates about taxing transactions just involving non-residents.
Contribuição de Intervenção do Domínio Econômico (CIDE) is a federal tax levied at 10% on royalties, licences of use (except for software licences) and remuneration for technical services paid or credited, monthly, by Brazilian legal entities (taxpayers) to non-residents. A 30% tax credit for the CIDE paid on royalties for trade mark and patents applies from 1 January 2009 to 31 December 2013.
Imposto sobre Operações Financeiras (IOF) is a federal tax levied on:
Credit (IOF-Credit), except for foreign credit, which is subject to IOF-Exchange.
Currency exchange (IOF-Exchange).
Insurance (IOF-Insurance).
Securities (IOF-Securities).
Gold aimed at being used as a financial asset or instrument of exchange policy (IOF-Gold).
The applicable rates and taxable bases vary per transaction type. IOF is commonly used for extra-fiscal purposes and lately the Brazilian government has increased the rates of the tax levied on actual or symbolic currency exchange carried out for cashing into Brazil:
Foreign investments into the local financial and capital markets.
Financings granted for a minimum average repayment term (nowadays of up to 720 days).
This is in response to an escalating flow of foreign currency into the country that has caused an undesired appreciation of the local currency (Real).
This a municipal tax levied at a maximum 5% rate on imported services or services provided in Brazil set out in a list approved by supplementary law (currently LC 116/03, which provides a comprehensive list of taxable services, including services rendered under public permissions/concessions).
Exports are exempt, but disputes arise concerning the concept of exported services. The taxpayers are the service providers, but the importer is responsible for calculating and collecting the tax on imported services. The tax base is the service price, and the tax rates vary per municipality by type of service. In São Paulo, the rates range from 2% to 5%. Tax law provides rules to solve conflicts of tax competence between different municipalities, but these conflicts are frequent. ISS is not a value added tax.
Foreign companies are generally only taxed in Brazil on:
Income earned from Brazilian sources (IRRF and ISS, see Question 6).
Property held in Brazil (for example, state tax on automotive vehicles (Imposto sobre propriedade de Veiculos Automotores) (IPVA) and municipal tax on real estate (Imposto sobre a propriedade Territorial Urbana) (IPTU).
However, they may be subject to the same tax applicable to Brazilian legal entities if they carry out business activities in Brazil.
Brazilian law lacks detailed rules to characterise a permanent establishment of non-residents, and analysis is made on a case-by-case basis, considering Brazilian double tax treaties and rules governing the following matters, among other legal principles (for example, non-discrimination between taxpayers):
The taxation of branches of foreign companies (mainly taxed as Brazilian legal entities under the IRPJ legislation, except for tax deductibility restrictions on costs or expenses not associated with the Brazilian business).
The taxation of commission merchants that receive goods for sale from foreign legal entities. These commission merchants must calculate their profits and the profits of the foreign company separately, according to the same rules applicable to branches of foreign companies, and are responsible for the IRPJ due on the activities of the foreign company, which may be arbitrated in the case of non-compliance with this obligation (see Question 4, Corporate taxes: Arbitrated profit).
The arbitration of profits from direct sales in Brazil closed by agents of a foreign company, if the agent is not an independent party, and the agent is not a mere mediator, but is vested with powers to represent and oblige, contractually, the relevant non-resident party (the agent is also responsible for the IRPJ due on the activities of the foreign company in this case).
Dividends paid by Brazilian legal entities to their shareholders or quotaholders (individuals or legal entities, and residents or non-residents) arising from profits accrued as from 1 January 1996, are exempt from withholding taxes. Other distributions are generally taxed with the IRRF, at 15% or 25% (see Question 6).
Brazilian legal entities can pay interest on equity (Juros sobre o Capital Próprio) (JCP) to their shareholders or quotaholders (which generates tax deductibility) as an alternative to dividends (which do not generate tax deductibility), subject to certain requirements.
The choice between dividends and JCP must take into account several factors, such as:
Applicable tax on the JCP income (15% or 25% IRRF applies on payments or credits of JCP to non-residents).
The qualification of the JCP as dividends or interest under double tax treaties.
Capital gains on the disposition of assets or rights (including shares or quotas of Brazilian companies) may be taxed with:
IRPJ, CSLL, PIS and COFINS (see Question 4), if earned by Brazilian legal entities.
IRRF (see Question 6), if earned by non-residents (individuals or legal entities).
15% individual income tax, if earned by individuals who are tax residents in Brazil (the beneficiary of the capital gains triggered by the sale of assets or rights must calculate and pay the tax, which is final, and not a tax prepayment).
IOF-Exchange (see Question 6) may be levied on exchange transactions closed for remittance of the capital gains overseas.
Gifted shares may be subject to ITCMD (see Question 3).
Tax exemptions and reliefs are available on a case-by-case basis. Some examples are:
PIS and COFINS (see Question 4) exemptions on revenues derived from the disposition of non-current assets (including long term investments).
IRRF (see Question 6) exemption on repatriations of capital invested in equity stakes, up to the value of the foreign investment registered, in foreign currency, with the Central Bank of Brazil.
0% IRRF on gains earned by foreign investors in the Brazilian financial and capital markets, on the sale of shares of Brazilian companies in stock exchanges, provided the investments were made and held in compliance with the National Monetary Council (Conselho Monetário Nacional) (CMN) rules.
0% IOF-Exchange (see Question 6) on repatriations related to capital invested in Brazilian financial and capital markets under the CMN rules (currently, this tax cut is balanced by a 2% to 6% IOF on funds cashed into Brazil to be invested in these markets).
The main advantages are:
Avoiding risks of business disruption (generally, the target company continues to use its licences and permits).
Avoiding costs with transfer taxes (see Question 3).
Benefitting from tax attributes of the acquired legal entity (for example, accrued tax losses and tax credits, see Question 4).
Benefitting from an earlier deduction of the premium paid for the equity stake, in the case of a merger of the buyer (if a Brazilian legal entity) and the target legal entity (see Question 13).
The main disadvantages are:
Greater complexity when structuring the deal and risks associated with tax planning.
It is often not possible to mitigate succession and related risks in share deals.
The main tax advantages are:
Avoiding costs with transfer taxes (see Question 3) and indirect taxes (PIS and COFINS, see Question 4, and IPI and ICMS, see Question 5).
Greater opportunities for tax planning.
The main disadvantage is greater complexity when structuring the deal and risks associated with tax planning (see Question 13).
Several transaction structures can be used to minimise the tax burden for buyers or sellers. Some examples are:
Incorporating or using a Brazilian company to buy shares or quotas of another Brazilian company (target company), to allow the buyer to benefit from an earlier deduction of the premium paid for the acquisition (see below).
Delivering shares or quotas owned by a Brazilian legal entity to its shareholders or quotaholders, if they are individuals who are tax resident in Brazil or non-residents, through a capital reduction or redemption, to allow them to sell their investment. Brazilian legal entities are subject to 34% capital gains tax (see Question 4), whereas tax-resident individuals and non-residents, except for non-residents in low-tax jurisdictions, are subject to 15% capital gains tax (see Question 6).
The structure set out in the first bullet point above was often used by foreign investors, because under tax law:
The buyer (a Brazilian company) could record a premium for the difference between the purchase price of the target company and its net worth value.
The premium could be supported by the expected profitability of the target company.
In a merger of the buyer and the target company, the premium supported in the expected profitability of the target company could be deducted at a maximum 1/60th rate per month, by the surviving company, when calculating its IRPJ and CSLL (see Question 4).
Although the legal provisions that support this alternative remain in force, their application may be limited by new Brazilian accounting rules. These provide for specific criteria to recognise and quantify the premium, in line with international accounting standards inspired by the substance over form principle.
Tax authorities have also challenged the premium tax deductions in some cases (mainly if the premium arises from intragroup transactions) and have used the new accounting principles to support the tax claims, among other arguments, regardless of the RTT that protect taxpayers against adverse tax impacts of the adoption of the new accounting rules by ensuring their tax neutrality. For this reason, this structure must be reviewed carefully, including based on the prevailing case law at the time when the acquisition is planned.
The choice of the best acquisition structure must be carefully studied considering, among other issues, the need for economic substance and business purpose. Artificial or purely tax driven structures must be avoided, in view of:
The new Brazilian accounting rules (see above).
Decisions granted by Brazilian administrative courts (in charge of reviewing tax assessments) as from 2006. These have broadened the concept of a sham, and adopted the substance over form and abusive exercise of rights doctrines to prevent purely tax-driven transactions, despite controversy about this matter.
Buyers should be careful with tax planning implemented by the seller of the relevant assets or investment, to avoid future tax claims.
These are mainly:
Transfer taxes (see Question 3).
Taxes levied on capital gains (see Question 9).
Indirect taxes: PIS and COFINS (see Question 4), IPI and ICMS (see Question 5).
IOF (see Question 6).
Tax exemptions and reliefs are available on a case-by-case basis. For example, there are tax exemptions or reliefs applicable to capital gains earned by individuals resident in Brazil on the sale of real estate, in certain circumstances.
The main advantages are:
Avoiding the need for a complex acquisition structure.
Mitigating succession and related risks (although asset deals may not avoid succession and related risks if the transaction falls under the concept of acquiring the seller's goodwill or business).
Allowing the buyer to recover the price paid for the assets, to the extent that the price can be allocated to assets or rights subject to depreciation, amortisation and depletion.
Generally, Brazilian tax law allows deductions for:
Depreciation expenses, arising from the reduction in value of assets due to wear and tear (tax law sets out maximum depreciation rates for several assets and adopts linear depreciation).
Amortisation expenses, related to:
costs, charges or expenses that contribute to the generation of future income;
capital invested in the acquisition of intangible assets or rights that will be used or exercised for a limited term.
Amortisation rates are determined based on the term for enjoyment of the expected benefits.
Depletion expenses, arising from reductions in the value of natural resources, due to their exploitation.
Depreciation, amortisation and depletion expenses, booked according to the new Brazilian accounting rules (which are inspired by the international accounting standards observed in the main capital markets), may not coincide with tax deductions allowed for the same expenses. Disputes may also arise because of the differences between accounting and tax rules, despite the general rule that changes in accounting practices required by the new accounting rules should be neutralised for tax purposes.
The main disadvantages are:
Risks of business disruption (the buyer may not be able to operate with the seller's licences and/or permits).
Transfer taxes (see Question 3).
Limitations on using tax attributes of the acquired business (the buyer may not be able to use the seller's tax credits and will not benefit from the seller's tax losses).
The main advantage is avoiding the need for a complex acquisition structure.
The main disadvantage is the cost of transfer taxes (see Question 3) and indirect taxes (PIS and COFINS, see Question 4 and IPI and ICMS, see Question 5).
Asset deals are less flexible than share deals in relation to tax planning opportunities. The most common structures are:
Allocating the acquisition price to assets or rights subject to depreciation, amortisation or depletion (see Question 16).
Selling business divisions (for example, a branch) instead of isolated assets, to reduce the cost of transfer taxes (see Question 3) and indirect taxes (see Questions 4 and 5).
Transferring the assets to be sold from legal entities to their shareholders or quotaholders, if individuals who are tax resident in Brazil or non-residents, to reduce capital gains tax (legal entities are subject to 34% tax, but tax resident individuals and non-residents are subject to 15% tax, except for residents in low-tax jurisdictions who are subject to 25% tax).
Mergers can be carried out at book or fair market value. Generally, adverse tax impacts can be avoided by the book value method. Some important tax consequences of mergers are (see Question 4):
Termination of the current period used to calculate the IRPJ and CSLL tax bases.
Triggering the earlier submission of tax returns.
Payment of the corporate taxes.
Forfeiture of tax losses of the merged company.
Exemptions and reliefs are available on a case-by-case basis. For example, ITBI (see Question 3) is not levied on the transfer of real estate through mergers.
See Question 19.
There are several ways of establishing a joint venture. This can be done on a case-by-case basis without adverse tax impacts, but in specific circumstances taxes are payable, for example:
Capital gains on the contribution of assets or rights to the JV (see Question 9).
Circulation of assets or inventories from one taxpayer to another, when establishing the JV, which may trigger IPI and ICMS (see Question 5).
Tax exemptions and reliefs are available on a case-by-case basis. For example, ITBI may not be levied on real estate contributed to the JV (see Question 3).
There are no commonly used structures to minimise taxes when establishing a JV, but there may be tax advantages in using a particular form, such as:
Establishing a JV through a silent partnership. This is instead of forming a new legal entity. The silent partnership is a private agreement whereby the parties share the results of an enterprise, but only one of them (ostensible partner) is liable for the enterprise to third parties. The other party (participant partner) is only liable for the obligations agreed with the ostensible partner.
The silent partnership does not have legal capacity, but Brazilian corporate tax legislation states that the results of the enterprise must be calculated, taxed and distributed as in the case of a regular company (see Question 4). Taxation of the enterprise with other taxes must be analysed on a case-by-case basis. This structure may be attractive when it is convenient to centralise the liabilities for the enterprise in one of the parties, for instance because of its stronger market reputation and/or knowledge of the business, and the parties desire separate taxation without incorporating a legal entity.
Establishing a JV through a consortium, to participate in a specific enterprise with a limited duration. This is instead of forming a new legal entity. Generally, consortiums are not taxed as legal entities, and their results have been accounted for and taxed by its parties, unless the consortium is disregarded and considered as an irregular legal entity and/or if its activities are not limited to a specific enterprise, with limited duration.
Corporate taxes (see Question 4) and indirect taxes (PIS and COFINS, see Question 4, IPI and ICMS, see Question 5) are the main taxes potentially payable on company reorganisations.
Tax exemptions and reliefs are available on a case-by-case basis. Transactions can be carried out in certain ways that may have tax advantages (see Question 27).
There are no commonly used structures to minimise taxes when reorganising Brazilian companies. However, this can be done on a case-by-case basis without adverse tax impacts or with tax advantages. For example:
Centralising administrative and/or legal and other similar costs and implementing cost-sharing agreements among Brazilian legal entities (disputes about the taxation of cost-sharing agreements must be addressed in this case).
Transferring the activities of one company to another, to minimise indirect taxes and offset taxable profits against tax losses.
Merging profitable companies into companies with accrued tax losses.
Artificial and tax-driven transactions must be avoided (see Question 13).
Liquidation causes the:
Termination of the current period for calculating the IRPJ and CSLL tax bases.
Earlier filing of tax returns.
Automatic distribution of profits earned overseas.
Payment of the corporate taxes.
Concluding the insolvency and liquidation of a Brazilian company involves bureaucracy and practical difficulties. However, Brazilian business restructuring and insolvency law does not generally provide for particular tax advantages or disadvantages. The exception is that a party that buys, on regular commercial terms, individual assets or a business from the insolvent company, during the realisation of its assets to pay its debts, is released from the insolvent company's past tax and labour liabilities.
Brazilian companies can buy their own shares and keep these shares in treasury. No taxes should be triggered on share buyback purchases, except for:
Taxes triggered on the seller's capital gains (see Question 9).
IOF-Exchange triggered on payments to non-resident sellers (see Question 6).
Gains on the sale of treasury shares can be excluded from taxable profits if certain requirements are met. Losses are not tax deductible.
There are no specific tax rules on MBO transactions. General tax rules outlined above apply. In particular, the rules relating to share and asset sales may be relevant (see Questions 9 to 18).
See Question 32.
See Question 32.
Various tax reform proposals have been discussed in the last decade, mainly to simplify the indirect tax system and avoid tax disputes between Brazilian states. These proposals have not moved forward because the Union, Brazilian states and municipalities have not agreed on how they should be compensated for resulting reductions in their tax revenues.
T +55 11 3819 4855
F +55 11 3819 5322
E cmagalhaes@machadoassociados.com.br
W www.machadoassociados.com.br
Qualified. Brazil, 1985
Areas of practice. Direct taxes; transfer pricing; international taxation.
Recent transactions
T +55 11 3819 4855
F +55 11 3819 5322
E fgirao@machadoassociados.com.br
W www.machadoassociados.com.br
Qualified. Brazil, 1989
Areas of practice. Direct taxes; transfer pricing; international taxation.
Recent transactions
