From October 1st, 2016 onwards, the legal changes introduced by Normative Rule No 1,658/2016 in Normative Rule No 1,037/2010 will come into force, listing the countries/locations considered as “tax havens” (“black list”) and the privileged tax regimes (“grey list”).
The current changes are relevant due to the fact that the countries and locations involved are often used in corporate and/or tax structures for companies doing business with Brazil.
Summing up, the aforementioned changes are the following ones:
- “Tax havens”:
- Inclusion of Curacao, Ireland and St. Martin;
- Exclusion of the Netherlands Antilles and St. Kitts and Nevis.
- Favorable tax regime: inclusion of the regime applicable to legal entities incorporated as holding companies set up in Austria.
Additionally, the Normative Rule provides for guidance on the identification of privileged tax regimes related to holding companies set up in Denmark and in the Netherlands. In order not to be included in the “grey list”, the mentioned holding companies must demonstrate substantial economic activity, which is defined as sufficient operational capacity available in the country of its domicile.
In general terms, the appropriate operational capacity is demonstrated through the employment of sufficient and qualified personnel by the holding company itself, and adequate physical facilities for the exercise of management and effective decision making process in connection with the:
- development of activities to get income from the assets it possesses; or,
- management of equity investments to get income from the distribution of income and capital gains.
The changes herein addressed are relevant because they will result in higher tax costs due to their implication on:
- the taxation of Withholding Income Tax (IRRF) on income and capital gains, the rate of which has increased to 25%;
- thin capitalization rules that provide for more restrictions to deduct costs associated to cross border loan transactions with related parties;
- the transfer pricing rules that shall apply even if the foreign party is unrelated;
- profits earned abroad by Brazilian companies that will be subject to Controlled Foreign Company rules (CFC).
Some Brazilian economic segments will be more affected than others, e.g. the aviation segment because of its leasing operations, and multinational enterprises that structured Brazilian investments through holding companies located in Austria and in the Netherlands.
São Paulo, 23 September, 2016
Ricardo Barretto Ferreira is a senior partner at Azevedo Sette Advogados
Fabio Capelletti is a senior associate at Azevedo Sette Advogados
Mauro Neto Marchiori is an associate at Azevedo Sette Advogados