Originally published in the June 22 edition of World Tax Daily (Copyrights Tax Analysts)
Investments into Brazilian financial and capital markets made from Brazil’s new low-tax jurisdictions or by investors under the listed special tax regimes will be immediately subject to higher taxation.
The Federal Revenue Department (FRD) introduced the new list of low-tax jurisdictions and special tax regimes on June 7 with Normative Instruction 1037/2010.
Under existing regulations, financial investments made by investors located in low-tax jurisdictions are not eligible for the special tax treatment granted to some financial investments made by foreigners, such as exemptions or reduced income taxation. Instead, investors located in low-tax jurisdictions are treated as Brazilian residents for purposes of determining taxation on financial investments. For example, while some capital gains realized by foreign investors in stock, merchandise, and futures exchanges are subject to zero taxation,1 the same gains realized by Brazilian residents are subject to a 15 percent tax.
The FRD’s Normative Instruction 1043/2010, published in the official gazette June 16, amends the current regulation on taxation of financial and capital investments and confirms that investments from low-tax jurisdictions are not eligible for the reduced taxation applicable to some foreign investments in Brazilian financial and capital markets.
The instruction also clarifies the possible change in tax treatment if a jurisdiction becomes listed, stating that the change in tax treatment will be effective as of the date the new regulation (list) is issued by the FRD.
The instruction provides that for the acquisition of bonds and securities, including participation in investment funds, the change in tax treatment (that is, treating a listed investor the same way as Brazilian residents) will take place as of the date of the new list, regardless of the acquisition date (of bonds, securities, and so on).
Normative Instruction 1043/2010 confirms that the income generated from financial and capital investments (bonds, securities, investment funds, and so on) will be taxed the same as that of Brazilian residents as of the date the new list has been issued by the FRD.
Interestingly, Normative Instruction 1043/2010 references only the change in tax treatment for investments made by listed low-tax jurisdictions; it does not mention a possible change in tax treatment for financial and capital investments made by foreign entities under listed special tax regimes.2 It is too early to determine whether financial investments made by those entities are subject to the same tax treatment as those domiciled in listed low-tax jurisdictions. The FRD would probably claim that the applicable tax treatment is the same, but Normative Instruction 1043/2010 does not specify that it extends its effects to companies using listed special tax regimes.
David Roberto R. Soares da Silva
Footnotes
1 Restrictions apply, and registration with monetary authorities is required.
2 Special tax regimes include those granted to certain companies formed under the laws of Luxembourg, Uruguay, Denmark, the Netherlands, Iceland, Hungary, U.S. state laws, Spain, and Malta.
David Roberto R. Soares da Silva