Originally published in the June 9 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Federal Revenue Department (FRD) on June 7 updated its list of low-tax jurisdictions. The new regulation also lists special tax regimes subject to the same stricter and more burdensome tax treatment in Brazil.
The new regulation adds Switzerland, among others, as a listed location and lists special tax regimes in countries such as the United States, Spain, the Netherlands, Uruguay, and Denmark.
Normative Instruction No. 1037/2010, published June 7 in Brazil’s official gazette, lists locations and special tax regimes subject to transfer pricing rules and aggravated (25 percent) withholding tax. It replaces and revokes the 2002 blacklist contained in Normative Instruction No. 188/2002 and is effective from its date of publication.
The new members of Brazil’s blacklist include: Ascension Island, Brunei, French Polynesia, Granada, Kiribati, Norfolk Island, Pitcairn Islands, Qeshm, Saint Helena, Saint Pierre and Miquelon, Solomon Islands, Swaziland, Switzerland, and Tristan da Cunha. The list also mistakenly lists Saint Kitts and Nevis twice, first with the English name and then with the Portuguese name.
The new list seems to be the result of extensive FRD research. Unquestionably, the greatest surprise is the inclusion of Switzerland as a list country. The full list identifies: Andorra, Anguilla, Antigua and Barbuda, Aruba, Ascension Island, Bahamas Community, Bahrain, Barbados, Belize, Bermuda, Brunei, Campione D’Italia, British Virgin Islands, Cayman Islands, Channel Islands (Jersey, Guernsey, Alderney, and Sark), Cook Islands, Costa Rica, Cyprus, Djibouti, Dominica, French Polynesia, Gibraltar, Grenada, Hong Kong, Isle of Man, Kiribati, Labuan, Lebanon, Liberia, Liechtenstein, Luxemburg, Macau, Madeira, the Maldives, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, the Netherlands Antilles, Niue, Norfolk Island, Panama, Pitcairn Islands, Qeshm, St. Helena, Saint Kitts and Nevis, St. Lucia, St. Pierre and Miquelon, St. Vincent and the Grenadines, American Samoa, Western Samoa, San Marino, the Seychelles, Singapore, Solomon Islands, Sultanate of Oman, Swaziland, Switzerland, Tonga, Tristan da Cunha, Turks and Caicos, United Arab Emirates, U.S. Virgin Islands, and Vanuatu.
Brazil’s concept of “low-tax jurisdiction,” originally adopted for transfer pricing purposes and defined as any location that did not tax income or taxed it at a maximum rate of 20 percent, has evolved over the years to apply to tax areas other than transactions subject to transfer pricing.
Effective January 1, 2009, the definition of low-tax jurisdiction was expanded to include countries and locations with legislation that does not allow access to information concerning the corporate structure of legal entities, their ownership, or identification of the beneficial owner attributed to nonresidents. Also effective January 1, 2009, transfer pricing and low-tax jurisdiction rules now apply to any transaction subject to a special tax regime in its home country, even if the parties are unrelated.
The following factors characterize a tax regime as a special tax regime sufficient to trigger transfer pricing rules and aggravated withholding tax:
- no tax on income, or taxation at a maximum rate of 20 percent;
- tax breaks to nonresident individuals or companies;
- no requirement for substantial economic activity in that country or location;
- not applicable in some jurisdictions if there is no substantial economic activity in that country or location;
- no taxation of foreign-source income, or taxation at a maximum rate of 20 percent; or
- no access to information about the corporate structure of legal entities, ownership of assets or rights, or economic transactions.
In late 2009, tax legislation on low-tax jurisdictions became stricter with the imposition of many new restrictions on payments to those locations, including deductibility of interest, general payments, and transfer of residency by Brazilian-resident individuals.
A significant innovation of the regulation is the listing of the special tax regimes in certain countries that will receive the same tax treatment as listed locations. Article 2 of Normative Instruction No. 1037/2010 lists tax regimes in important countries such as the United States, the Netherlands, and Uruguay.
The full list of special tax regimes identifies:
- the tax regime applicable to legal entities formed as holding companies under the laws of Luxembourg;
- the tax regime applicable to legal entities formed as financial investment corporations (Sociedad Anonima Financiera de Inversion, or SAFI) under the laws of Uruguay;
- the tax regime applicable to legal entities formed as holding companies under the laws of Denmark;
- the tax regime applicable to legal entities formed as holding companies under the laws of the Netherlands;
- the tax regime applicable to legal entities formed as International Trading Companies (ITC) under the laws of Iceland;
- the tax regime applicable to legal entities formed as offshore KFTs under the laws of Hungary;
- the tax regime applicable to legal entities formed as limited liability companies under U.S. state laws that are not subject to U.S. federal income tax and whose members are nonresidents (in the U.S.);
- the tax regime applicable to legal entities formed as Entidades de Tenencia de Valores Extrajeros (ETVEs) under the laws of Spain; or
- the tax regime applicable to legal entities formed as ITCs or International Holding Companies (IHCs) under the laws of Malta.
David Roberto R. Soares da Silva