11.1. a 11.21. Taxation in general (taxes, fees and contributions)

11.1. Local taxation – introduction

Historically, Brazilian tax legislation is complex. Despite of the government’s efforts to reduce and simplify the Brazilian tax system there still exists a large number of taxes and pulverized rules currently in force. This chapter briefly addresses the main taxes that are levied in the businesses conducted with Brazil, as well as the most important aspects related to the taxation of the individual’s income in Brazil, which also affects non-residents and, more particularly, the expatriates.

11.2. Individual Income Tax (“IRPF”)

Brazilian law distinguishes resident from non-resident individuals. Generally, a resident in Brazil is the individual who resides in Brazil permanently or an individual who enters the country with permanent or temporary visa (to work in Brazil with employment tie or after 184 days of stay). As regards foreign individuals, however, specific rules are applied, as quoted below.

11.2.1. Payments to Non-Resident Individuals

As a general rule, remuneration paid by a Brazilian source for services supplied by non-resident individuals are subject to withholding income tax at the rate of 25%.

11.2.2 Visas

As of January 1st, 1999 individuals that hold temporary visas are considered residents for tax purposes upon their entry in Brazil to work pursuant to a labor agreement. Thus, they are required to file an annual income tax report, also stating their foreign income. The payments are subject to progressive income tax at the rate of 0%, 7.5%, 15%, 22.5% or 27.5% (maximum tax rate).

Further, individuals that hold temporary visas who enter Brazil for any other reason other than to work under a labor agreement are considered residents for tax purposes after a permanence of 183 days in a 12-month period as of the date of entry.

11.2.3 Non-Residents

Expatriates treated as non-residents are subject to Brazilian income tax only in regard to the income earned from Brazilian sources, whether individuals or companies.

The Brazilian source of income pursuing from salaries and remuneration is subject to a standard withholding income tax of 25% while capital gains are subject to a 15% withholding income tax. This taxation may be reduced in cases where a treaty to prevent dual taxation applicable to the case exists. As of January 1st, 2017, the taxation of the Income Tax over the capital gain earned as a result of the disposal of assets and rights of any nature will be subject to the following progressive rates: 15% over gains that do not exceed R$ 5,000,000.00; 17.5% over gains that exceed R$ 5,000,000 but do not exceed R$ 10,000,000.00; 20% over gains that exceed R$ 10,000,000.00 but do not exceed R$ 30,000,00.00; and 22.5% over gains that exceed R$ 30,000,000.00.

The tax is usually based on gross income, net of any deductions, being due upon the crediting, availability or use of the resources on behalf of the non-resident or remittance thereof to the non-resident, whichever occurs first.

11.2.4. Individual who becomes a non-resident

Individuals residing in Brazil who retire permanently from Brazil in the course of the calendar year must file the following documents in order to formalize such condition: (i) the Definitive Country Exiting Statement, relative to the period in which he/she remained as resident in Brazil during the calendar year of exit, until the last working day of April of the calendar year following the departure; (ii) the income tax returns relating to previous calendar years, in case of tax due; and (iii) the Definitive Country Exiting.

In case income tax is due, amounts related to specific contributions and expenses can be deducted.

If the individual leaves permanently from Brazil without filing the Definitive Country Exiting Statement and the Definitive Country Exiting, the income earned by the individual will be taxed by income tax at the progressive rates applicable to residents of Brazil (7.5% to 27.5%) during the first 12 (twelve) months from the date of exit, and, as from the 13th (thirteenth) month, by the income tax at the rates of 0%, 15% or 25% depending on the nature of the income.

11.2.5. “IRPF” – progressive tax rates

Brazilian residents are subject to the payment of income tax on their global income with progressive tax rates, which vary according to the specific class in which the taxpayer is classified, based on the overall taxable net profit earned. The current tax rates are as follows: (i) 0% for monthly income whose value does not exceed R$ 1,903.98; (ii) 7,5% for monthly income from R$ 1,903.99 to R$ 2.826,65 (iii) 15% for monthly income from R$ 2,826.66 to R$ 3,751.05; (iv) 22,5% for monthly income from R$ 3,751.06 to R$ 4,664.68 and; (v) 27.5% for monthly earnings over the figure of R$ 4,664.68.

The Brazilian Federal Government published, on April 30, 2023, Provisional Measure (“MP”) No. 1,171/2023 which, one of its matters, changes the individual’s progressive table of income tax (IRPF) as of May 2023. The table readjusts the exemption range, exempting (i.e. 0% rate) taxpayers earning up to R$2,112.00. However, it is important to note that the MP must be converted into law for it to become fully effective.

11.3. Corporate Income Tax (“IRPJ”)

Most of the Brazilian legal entities are subject to Corporate Income Tax (“IRPJ”). Basically, there are two main mathods that Brazilian taxpayers may opt to calculate the corporate income tax: (i) actual profits method and; (ii) presumed method. Regarding the first method, the IRPJ is computed at a 15% rate on adjusted net income. Annual net income in excess of BRL 240,000 is also subject to a surtax of 10%

According to Law No. 9,430 of December 30, 1996 the taxpayer may elect to calculate the IRPJ under the actual profits method on an annual or quarterly basis. If the IRPJ is calculated quarterly, it may also be paid on a quarterly basis. Over the quarterly net income, a 15% tax rate should be levied, plus an additional rate of 10% over the net profit that exceeds R$ 60,000.00 per quarter. On the other hand, if the IRPJ is calculated on an annual basis, the taxpayer advances the monthly payments of the IRPJ, calculated based on an estimated income (or by means of the profit obtained by the analysis of monthly balance sheets).

In the case of electing the actual profit method, with payment of monthly anticipations, the entities at the end of the year must either pay or request reimbursement for the difference between the amount paid monthly and the one calculated on annual income.

For taxpayers that have adopted the actual profit method, net operating losses (“NOLs”) generated in a given period can offset the taxable income of the subsequent period, limited to 30% of the taxable income (i.e., for each BRL 1 of income, BRL 0.70 must be subject to taxation, regardless of the existing amount of NOL). Tax losses may be carried forward, without statute of limitations.

Considering the second method (i.e.presumed method), to a large number of companies the monthly presumed profit corresponds to 8% of the total monthly gross revenues plus capital gains, earnings and eventual other revenues. Such percentages ranges from 8% to 32% according to the economic activity in which the taxpayer is engaged. A tax rate of 15% applies over this tax basis, plus a surtax of 10% over the presumed profit that exceeds R$ 20,000.00 per month.

The following tax rates of income tax apply over the presumed profit: 15% income tax plus an additional 10% over the amount that exceeds R$ 60,000.00 per quarter. If the method of presumed profit is adopted to calculate the income tax the taxpayer is not subject to adjustment of the annual income tax that is asserted.

However, the possibility of adopting the presumed profit method is subject to the fulfillment of certain conditions, such as:

incomes asserted in the preceding year cannot exceed R$ 78,000,000.00;
• the profit, capital gains or other gains cannot have a foreign origin;
• financial institutions or similar organizations, as determined in Brazilian law, cannot adopt the presumed profit method for income tax purposes;
companies with securitization activities for real estate, financial and agribusiness credits
• companies cannot be beneficiaries of tax incentives granted under Brazilian law (e.g. tax exemption or reduction of income tax);
• companies cannot have paid income tax calculated based on a monthly estimate;
• factoring companies cannot adopt the presumed profit method; and
• companies created as specific purpose companies (“SPE”), etc.

11.4. Social contribution on net profit (“CSLL”)

In addition to Corporate Income Tax (IRPJ) the Brazilian companies are subject to the payment of the social contribution on the net profit (“CSLL”). The current tax rate is 9%, with the exception of financial institutions that, due to Law No. 13,169/2015 and Constitutional Amendment No. 103/2019, in force as of September 1st, 2015, are subject to a CSLL rate of 20%.

CSLL is levied separately form the IRPJ given that the CSLL is paid to the Social Security and not to the Brazilian Federal Revenue, which collects the IRPJ.

The tax basis of the CSLL is the net profit specifically calculated for the CSLL payment purposes. The calculation basis for CSLL is subject to calculation upon the definition of the taxable income or presumed profit (upon application of the percentage that varies pursuant to the activity performed, being such percentage applicable on the gross revenue obtained by the legal entity), as per the criteria defined by the taxpayer.

Similar to IRPJ, the taxpayers that have adopted the taxable income may calculate the CSLL on an annual or a quarterly basis. In the event the calculation of the CSLL is performed on an annual basis, the payments must be made based on an estimate. The same rules applicable to IRPJ applies in this case. In other words, in case the CSLL is due on an annual basis, the monthly payments and the accrual upon the ending of the calendar-year are mandatory, in such a way that it is possible to offset an eventual negative balance with other federal taxes or even to request a tax refund before the Federal tax authorities.

The legislation establishes that the CSLL can no longer be deducted from the net profit for the purposes of calculating IRPJ.

The negative tax basis of the CSLL (tax loss for CSLL purposes) may be used to offset the taxable profit in the subsequent periods, limited to 30% of the taxable profit in each calculation period. Similar to what occurs in regard to the tax loss for IRPJ purposes, the negative tax basis of the CSLL may be used by taxpayers that have adopted the taxable income to offset a future taxable income, without a transient limit for the expiration for usage of these amounts.

For the taxpayers that have adopted the presumed profit, the calculation of CSLL shall be performed on a quarterly basis, constituting the calculation basis of 12% over the gross income (however, such percentage for calculation of the presumed profit varies between 12% and 32%, depending on the specific activities carried out by the company). The rate of 9% is applicable to the presumed profit. If the presumed method of taxation is adopted, the taxpayer will not be subject to any adjustment according to the actual profits method.

11.5. Transfer pricing

The Rules dealing with Transfer Pricing in Brazil were introduced by Law No. 9,430 of December 27, 1996, with application since January 1st, 1997. Such rules set forth the system for calculation of the maximum amounts to be deducted as expenditures and the minimum amounts to be considered as taxable income of Brazilian legal entities that perform transactions with related parties established abroad or other transactions subject to standards on transfer pricing under the Brazilian law.

The standards on transfer pricing rules also apply to foreign transactions executed by individuals or legal entities, regardless of the parties being deemed as “related”, in case of parties (i) resident or domiciled in a country which taxes the legal entity’s profit at a nominal tax rate lower than 20%1 ; (ii) resident or domiciled in country whose legislation does not allow the disclosure related to the corporate organization; (iii) or subject to the so-called “privileged tax regime”.

11.5.1 Concept of related parties

Normative Ruling No 1,312/12, issued by the Brazilian Federal Revenue, provides that the following parties are deemed as related of the Brazilian legal entities (or individuals) for transfer pricing purposes:

The main office thereof, when domiciled abroad;
• Its branch, when domiciled abroad;
• The individual or the legal entity, resident or domiciled abroad, whose corporate interest in its capital stock characterizes the latter as its controller or affiliated company, according to the provisions set forth by the Corporate Law;
• The legal entity domiciled abroad which is characterized as its controlled or affiliated company, according to the provisions set forth by the Corporate Law;
• The legal entity domiciled abroad, when the latter and the company domiciled in Brazil are under common corporate or administrative control, or when at least ten percent of the capital stock of each one of them belongs to the same individual or legal entity;
• The individual or legal entity, whether resident or domiciled abroad, which, jointly with the legal entity domiciled in Brazil, have corporate interest in the capital stock of a third legal entity, whose sum characterizes them as controllers or affiliated companies, according to the provisions set forth by the Corporate Law;
• The individual or legal entity, resident or domiciled abroad, which is its associated, under the form of consortium or condominium, as set forth in the Brazilian legislation, in case of any business;
• The individual resident abroad that is a relative, third kinsman or kinswoman, spouse or companion of any of its directors or its partner or controlling shareholder through direct or indirect interest;
• The individual or legal entity, resident or domiciled abroad, which enjoys exclusivity, as its representative, distributor or concessionaire, for purposes of sale of goods, services or rights; and
• The individual or legal entity, resident or domiciled abroad, in relation to which the legal entity domiciled in Brazil enjoys exclusivity, as representative, distributor or concessionaire, for purposes of sale of goods, services or rights.

The rules on transfer pricing apply to transactions executed by the legal entity domiciled in Brazil, by means of intervention of person who is not characterized as a related-party, which used to perform activities together with another company located abroad, which is characterized as a related-party of the Brazilian company.

Finally, according to Normative Ruling No. 1.312/12, the existence of relationship with individuals or legal entities abroad shall be reported by the Brazilian legal entities upon the filling of the Tax Accounting Bookkeeping (ECF).

11.5.2. Methods for calculation of the transfer pricing

The Brazilian legislation related to transfer pricing adopts four methods in order to define the maximum deductible amount that applies to the expenditures, costs and charges incurred upon the importation of goods, services and rights from the related party. The methods are the following:

Comparable Uncontrolled Price Method – CUP
2. Resale Price Less Profits Method – RPM
3. Production Cost Plus Taxes and Profits Method – CPM
4. Exchange Import Price – PCI

In case of exports, the legal entity will be subject to arbitration whenever the average sale price in such transactions is inferior to 90% in relation of the average price adopted in the transactions performed with non-related parties in the domestic market during the same period, through similar conditions of payment. Should the average price among the parties be inferior to 90% of the average price executed in the Brazilian market, the income of export will be adjusted based on the methods appointed below:

Average Export Sales Price – CUP
2. Wholesale Price in Country of Destination Less Profits – PVA
3. Retail Price in Country of Destination Less Profits – RPM
4. Purchasing or Production Cost Plus Taxes and Profits – CPM
5. Exchange Export Price – PECEX

Methods Applicable to Import of Goods, Services and Rights

Comparable Uncontrolled Price – CUP

This method is defined as the weighted arithmetic average of the prices of goods, services or rights, whether identical or similar ones, adopted in the Brazilian market or in other countries, in sale transactions, through similar conditions of payment. In other words, the legal entity shall compare the costs, expenditures and charges related to the goods, services or rights proceeding from related parties, during a given time, with the quoted weighted arithmetic average.

As clarified by the Brazilian Federal Revenue in the Normative Ruling No. 1,870/19, the parameter prices shall be determined exclusively in the calendar year in which the goods, services or rights are imported.

For identical goods, services or rights, Normative Ruling No. 1,312/12 allows adjustments related to:

Payment terms;
2. Quantities negotiated;
3. Obligations related to warranty for the good, service or right
4. Obligations related to promotion of the good, service or right by means of marketing and advertising
5. Obligations for quality control, standard of services and health conditions
6. The costs of intermediation in sales transactions executed by non-related companies, only considered for purposes of comparison of prices;
7. Packaging;
8. Freight and insurance; and
9. Costs of landing at the port, of internal transport, of storage and of customs clearance including the import taxes and duties, all in the destination country of the good.

In addition to the adjustments listed above, the legislation deals with adjustments due to differences as to the physical and content-related nature of goods, services or rights exclusively present in those parts corresponding to the differences among the models that are under comparison. In addition, for purposes of transfer pricing regulations, two or more goods will be considered in similar conditions of use when, simultaneously, they: (i) have the same nature and function; (ii) are mutually replaceable; and (iii) have equivalent specifications.

Further as regards the arithmetic average, only the transactions executed between non-related purchasers and sellers will be considered for purposes of calculation of the same arithmetic average. Furthermore, it is worth mentioning that Law No. 9,430/96 and the Normative Ruling No. 1,312/12 do not elect a preferential jurisdiction, whether if it is local, state or foreign, in which the prices of the transactions among the non-related parties will be used as basis.

Thus, the legal entity may consider, for purposes of calculation of the arithmetic average of the prices for goods, services or rights, the prices of the transactions performed together with non-related parties (which are not subject to rules of transfer pricing) assessed in the Brazilian market or in markets of other nations, import/export transactions as well as transactions performed outside the Brazilian territory.

Normative Ruling No. 1,312/12 provides that, as of January 1st, 2013, the transactions used for calculating the CUP method must: (i) represent at least 5% of the value of the imports subject to transfer pricing control carried out by the Brazilian legal entity during the calculation period related to the type of good, right or service imported, in the event that the data used for the calculation is related to its own transactions; and (ii) correspond to uncontrolled prices of the same calendar-year of the respective import transactions subject to transfer pricing control.

In case the transactions of the calculation period do not represent 5% of the value of the imports subject to transfer pricing control, as mentioned in item “i” above, or in the event there is no uncontrolled prices related to the same calendar-year of the import transactions, as mentioned in item “ii” above, it is possible to complement the percentage with the imports performed in the immediately preceding calendar-year or prices related to transaction carried out during the immediately preceding calendar-year. For this purpose, Normative Ruling No. 1,312/12 provides for the formula to calculate the exchange rate adjustment of the period.

Resale Price Less Profit Method – RPM

The Resale Price Less Profit Method can be utilized in two scenarios: (i) when the imported goods, rights or services are consumed in further manufacturing or production process; or (ii) when the imported goods, rights or services are re-sold exactly as imported.

As clarified by the Brazilian Federal Revenue in the Normative Ruling No. 1,870/19, the arithmetical average of resale prices shall be determined by the purchases carried out during the calculation period, the existing inventory balance (at the beginning of the calculation period), less the amounts and quantities remaining in the inventory upon its closing.

The resale price less profit method (“RPM”) is defined as the arithmetical average of resale prices of goods (in Brazil) less:

Unconditional discounts granted;
2. Taxes and contributions imposed on sales;
3. Commissions and brokerage fees paid; and
4. A profit margin based on the economic sector of the legal entity subject to transfer pricing control, calculated over the sale price after deducting the three items above and determined according to a proportional calculation. The margins are as follows:

40 % to the sectors of:
a) pharmaceutical and pharmaceutical chemical products;
b) tobacco products;
c) optical, photographic and cinematographic equipment and instrument;
d) machinery, apparatus and equipment for dental medical and hospital use;
e) extraction of oil and natural gas;
f) products derived from petroleum;
30 % to the sectors of:
a) chemical products;
b) glass and glass products;
c) cellulose, paper and paper products;
d) metallurgy;

III. 20 % to other sectors.

When establishing this method, Normative Ruling No. 1,312/12 not only defines the calculation of “parameter price” (preço parâmetro), but also determines that this price should be calculated considering the percentage of the imported goods, services or rights in relation to the total cost of the manufactured product, the so-called proportional calculation.

The resale price to be considered for purposes of this method is the price adopted by the taxpayer in the wholesale or the retail markets with unrelated purchasers, either individuals or legal entities. Differences in payment conditions can be adjusted according to the interest rate adopted by the taxpayer in its regular sales. If no interest rate applies consistently, the adjustments in payment conditions must be made according to interest rates provided for in the regulations.

For purposes of calculating the proportional percentage of the imported products for calculating the parameter price under the RPM it shall not be included in the weighted average cost of the imported good, right or service: (i) the value of the freight and insurance incurred by the importer and paid to non-related parties (or parties located in regular jurisdiction); (ii) the taxes levied upon importation; (iii) and the expenses with customs clearance. On the other hand, such amounts must be considered for the calculation of the total weighted average cost of the same product, which may result in a lower parameter price.

However, according to the understanding of the Brazilian Federal Revenue in the Request for Ruling No. 17/2018, these amounts will be included in the cost of the imported good if they are included in the International Commercial Terms – Incoterm. Thus, in the case of transactions contracted with Incoterms, where freight and insurance are the responsibility of the exporter, these amounts must be computed in the cost of the imported good, service or right for purposes of calculating the parameter price under the PRL method.

Production Cost Plus Profit Method – CPM

This method may be defined as the average manufacturing cost of goods, services or rights, either identical or similar, in the country where they have been originally manufactured, plus the export taxes charged by the quoted exporter country and a 20% profit margin, calculated over the production cost. The items below may be included in the manufacturing cost for purposes of this method:

The cost for acquisition of raw-materials, intermediary products and packing materials used in the manufacturing process of the good, service or right;
2. The cost with any other goods, services or rights applied or consumed in the manufacturing process;
3. The cost of the personnel used in the production of the good, service or right, including those associated with direct supervision of the manufacturing process or production, maintenance and security of production facilities and corresponding social charges required or admitted according to the regulations of the country where the goods (services or rights) are produced;
4. Costs of rents, leases, maintenance and repair, and depreciation and amortization charges of the goods, services or rights used in the production of the relevant good, service or right and;
5. Reasonable losses in the production process admitted by the tax legislation of the foreign country.

Exchange Import Price Method – PCI

The Exchange Import Price Method may be defined as the prices of goods or rights subject to quotation in future and exchange markets internationally recognized, adjusted upwards or downwards of the average market premium, at the transaction date or at the date of registration of the import declaration, if this date is not identified.

This method must necessarily be applied on imports of commodities subject to quotation in future and exchange markets internationally recognized, performed as of January 1st, 2013. It shall be considered as commodities for purposes of the PCI:

the products listed in Annex I and that, cumulatively, are subject to public prices in exchanges markets listed in Annex II, all Annexes of Normative Instruction No. 1,312/12; or
the products listed in Annex I and that, cumulatively, are subject to public prices in internationally recognized sectorial research institutions listed in Annex III, all Annexes of Normative Instruction No. 1,312/12.

Besides the premium, it shall be considered the variations in the quality, characteristic and substance content of the goods sold.
Moreover, the commodity value may suffer adjustments related to the differences of the value supported by the seller and the specifications of the template agreement established by the exchange market or sectorial research institutions, taking into account the specific business conditions, sales conditions (Incoterm), conditions of content and nature, and adjustments corresponding to the variables that are considered in the commodity’s specific quotation:

payment term,
2. negotiated quantities,
3. climatic influences in the imported good characteristics,
4. intermediation costs in the purchase and sale transactions carried out by non-related companies,
5. packaging,
6. insurance and freight,
7. costs of landing at the port, of internal transport, of storage and of customs clearance including the import taxes and duties, all in the destination country of the commodity.

Methods Applicable to the Export of Goods, Services and Rights

For application of any of the methods described below, the price of export in a transaction among related parties shall be inferior to 90% of the average price performed in sales among non-related parties in the Brazilian market (if any). In other words, in case the price of export for the related party do not reach such percentage, the company will have to prove that it complies with the rules of transfer pricing according to the amount defined through one of the five methods provided in the legislation for purposes of export.

Export Sales Price Method -CUP

The Export Sales Price Method may be defined as the weighted arithmetic average of the sale price in exports performed by the company itself for non-related parties or by other domestic exporters of goods, services or rights, whether identical or similar ones, during the same period of survey for calculation basis of the corporate income tax and through similar terms of payment . The same adjustments described for the PIC Method (in case of import) apply in this case.

Retail Price in Country of Destination Less Profit Method – RPM

The said method is defined as the weighted arithmetic average for the sale prices of goods (identical or similar prices) which are performed in the wholesale market of the origin country, through similar terms of payment , being such prices deducted from:

The taxes included in the price which are charged in the quoted country; and
2. The profit margin of thirty percent (30%) on the sale price performed in the retail business.

Wholesale Price in Country of Destination Less Profit Method – RPM

The taxes included in the price which are charged in the quoted country; and
2. The profit margin of fifteen percent (15%) on the sale price performed in the wholesale business.

Purchasing or Production Cost Plus Taxes and Profit Method – CPM

This method is defined as the weighted arithmetic average for the costs of purchasing of imported goods, services or rights plus taxes and contributions charged in Brazil and a profit margin of fifteen percent (15%) on the amount of the costs plus taxes and contributions.

Exchange Export Price – PECEX

The Exchange Export Price Method may be defined as the prices of goods or rights subject to quotation in future and exchange markets internationally recognized, adjusted upwards or downwards of the average market premium, at the transaction date or at the date of the shipping of the good on the exportation, if this date is not identified.

This method must necessarily be applied on exports of commodities subject to quotation in future and exchange markets internationally recognized performed as of January 1st, 2013.

It shall be considered as commodities for purposes of the PECEX:

the products listed in Annex I and that, cumulatively, are subject to public prices in exchanges markets listed in Annex II, all Annexes of Normative Instruction No. 1,312/12; or
the products listed in Annex I and that, cumulatively, are subject to public prices in internationally recognized sectorial research institutions listed in Annex III, all Annexes of Normative Instruction No. 1,312/12.

Besides the premium, it shall be considered the variations in the quality, characteristic and substance content of the goods sold.

Moreover, the commodity value may suffer adjustments related to the differences of the value supported by the seller and the specifications of the template agreement established by the exchange market or sectorial research institutions, considering the specific business conditions, sales conditions (Incoterm), conditions of content and nature, and adjustments corresponding to the variables that are considered in the commodity’s specific quotation: (i) payment term, (ii) negotiated quantities, (iii) climatic influences in the imported good characteristics, (iv) intermediation costs in the purchase and sale transactions carried out by non-related companies, (v) packaging, (vi) insurance and freight, (vii) costs of landing at the port, of internal transport, of storage and of customs clearance including the import taxes and duties, all in the destination country of the commodity.

Safe Harbors in exports

The “Safe Harbors” provided in the Brazilian Transfer Pricing Rules cannot be characterized as perfect “safe harbors”, particularly because the tax authorities have the power to not accept the amount of revenues recognized by the taxpayer in accordance with those “safe harbors”.Besides the methods described below, the legislation in respect of the transfer pricings foreseen some situations in case of export, which are referred to as Safe Harbors usually. However, such Safe Harbors can not be considered as perfect Safe Harbors, once the authorities may accept or not the amount of the income acknowledged by the legal entity in conformance with such Safe Harbors.

Normative Ruling No. 1,312/12 provides as follows:

(i) The legal entity in charge of verifying the net profit (before the provision for the tax income and for social contribution on the profit) proceeding from sale incomes in the exports for related parties through amount equivalent to at least ten percent (10%) of the total of such incomes may prove the suitability of the prices performed in such exports, exclusively by means of the documents related to the transaction itself. The percentage of 10% on the net profit shall be considered by using the annual average of the calendar year itself and the two precedent years. The referred “safe harbor” only applies in case that the net revenues of exports to related parties is not higher than 20% of the total export net revenues. For the assessment of the net profit corresponding to such exports, the common costs and expenditures related to sales will be prorated respecting the respective net profit. The calculation of this Safe Harbor can not include the sales of rights, goods or services whose profit margin has been amended through Consultation before the Finance Minister;

(ii) The legal entity whose net profit of the exports, in the calendar year, does not exceed 5% of the total of the net profit in the same period may also prove the suitability of the prices performed in such exports, exclusively by means of the documents related to the transaction itself.

As previously mentioned, these Safe Harbors can not be considered as perfect, once they only reveal the burden of proof for the tax authorities in charge of providing evidence that the prices performed are not in compliance with the market prices. Such Safe Harbors are not applied to exports of goods, rights or services in case of exporters domiciled in countries with a privileged tax regime or countries whose legislation does not allow the disclosure related to the corporate organization.

11.5.3. Transfer pricings – supplementary rules

AAmendment to margin

It is possible to amend the fixed margins imposed by the transfer pricing rules in respect to the methods applicable to export and import transactions.
Therefore, the legal entity (or trade association that represents of the economic sector) shall submit an application before the Treasury Department in conjunction with other documents. After the submission of the petition, the said Treasury Department will verify the application, the term during which it is intended to apply the amended margin as well as the remaining documents submitted.

Ordinance No. 222/08 provides detailed directives for the filing of a request to amend the statutory profit margins including, for each method, the documents and data that must be presented to the competent authorities.

Financial loans and transactions among related parties

For agreements executed until 2012, the interest paid or credited to related companies or under the other transactions subject to the transfer pricing rules should be deductible based on the interest rates registered before the Brazilian Central Bank. If such agreements were not registered, the interest should be deductible up to the amount not exceeding the value calculated based on the London Interbank Offered Rate (“LIBOR”), for deposits made in Dollars from the United States of America for a 6-month term, plus a 3% annual spread.
For agreements executed as of 2013, interest paid or credited to related companies or under the other transactions subject to the transfer pricing rules is only deductible up to the amount not exceeding the following interest rates, increased by a spread based on the market average to be defined by the Minister of Finance:

a) In case of transactions performed in United States of America Dollars with a prefixed rate: the sovereign bonds of the Federal Republic of Brazil issued in the foreign market in dollars from the United States of America;
b) In case of transactions performed abroad in Brazilian Reais with a prefixed rate: the sovereign bonds of the Federal Republic of Brazil issued in the foreign market in Brazilian Reais; and
c) For the remaining transactions: the LIBOR during a six-month term.
With respect to interest expenses, Ordinance No. 427 established a maximum 3.5% spread to be added to the interest rates set forth above.
Regarding the minimum amount of taxable income, Ordinance No. 427 sets a 2.5% minimum spread to be added to the interest rates mentioned above. In this case, in relation to the transactions occurred between January 1, 2013 and August 2, 2013, the Brazilian taxpayer may consider a 0% spread in order to determine the minimum taxable income.

Book Adjustments in case of imports (Law No. 10,637/02)

In case the acquisition cost exceeds the highest deductible amount determined according to the methods provided for in Law No. 9,430/96, Article 45 of Law No. 10,637/02 established methods for the adjustment of the acquisition cost of goods, rights and services imported from related companies. Accordingly, the exceeding amount shall be debited from the accumulated profits account (“conta de resultados acumulados”) and credited to (i) the asset account in which the acquisition of the goods, services or rights was registered or (ii) the cost or expense account of the accrual period, which registers the amount of the goods, services or rights, in case the referred assets have been already realized.

Upon the calculation of the tax basis for income tax purposes, if the legal entity elects to register the exceeding amount calculated in each accrual period only at the moment of the sale of the goods, services or rights, the total exceeding amount should be excluded from the company’s net equity, for purposes of determining the tax basis for the calculation of the interest on equity.

Supporting Documentation

In Brazil, the taxpayer has the burden to demonstrate compliance with transfer pricing rules; otherwise, the tax authorities may issue a tax assessment against the taxpayer. The costs and average prices provided by Law No. 9,430 shall be based on either official information and reports from the importing or exporting country, or research conducted by companies or institutions with renowned technical expertise.

Informative Return

Currently there is no specific transfer pricing return that needs to be filled before the Brazilian IRS. Taxpayers need to inform in their annual tax return (ECF) the transactions with related individuals or legal entities domiciled abroad.

Place and Date of Filing

Taxpayers in Brazil must file their annual income tax return and, consequently, their information related to transfer pricing according to the periods established every year by the Federal Revenue Services regulations. The term established to individuals is generally up to the last business day of April and to legal entities under the actual profit method is generally up to the last business day of June.

Transfer Pricing Adjustments

For goods, services and rights imported from a related party, the taxpayer must prove that the corresponding costs, expenses and charges do not exceed the maximum deductible expenses under at least one of the four methods set forth by transfer pricing regulations (the PCI method is applicable only to importation of commodities). Otherwise, the tax authorities may challenge the exceeding deduction.

The exceeding amount shall be added back as taxable income and will thus be subject to corporate income tax at the rate of 15% plus a surtax of 10%. The 9% CSLL on adjusted income also applies on the exceeding amount.

Reductions

If the taxpayer decides to pay within 30 days as from the tax assessment, there is a 50% discount on the 75% penalty. If the taxpayer decides to pay within 30 days as from the administrative decision, there is a 30% discount on the penalty.

11.5.5 Thin Capitalization Rules

Federal government enacted on December 15, 2009 Provisional Measure No. 472 which, among other changes, establishes limitations regarding the deductibility of accrued interest in case of loans executed with foreign related parties and/or with lenders domiciled in low-tax jurisdictions or subject to privileged tax regimes.

This Provisional Measure was converted into Law No. 12,249, dated June 11, 2010. The new rules of thin capitalization are divided in two kinds: (i) rules applicable to transactions with related parties, except for transactions with parties subject to a privileged tax regime or domiciled in low tax jurisdictions; and (ii) rules applicable to transactions under a privileged tax regime or carried out with parties domiciled in low-tax jurisdictions.

Rules applicable to transactions with related parties, except for transactions with parties subject to privileged tax regimes or domiciled in low-tax jurisdictions.

Debt equity ratio: 2:1

Notwithstanding the rules limiting the deductibility of interest expenses foreseen in the Brazilian transfer pricing legislation, the interest paid or credited by a Brazilian source to a related legal entity or individual, resident or domiciled abroad, will be deductible within the fiscal year for purposes of calculating the corporate income taxes if they cumulatively meet the following requirements:

In case of the debt funding extended by a related entity abroad with corporate interest in the Brazilian company, the sum of the debt funding, verified on the date of the accrual of the interest, shall not exceed two times the amount of equity participation of the related foreign party in the net equity of the Brazilian company;

In case of the debt funding extended by a related entity abroad with no corporate interest in Brazilian company, the sum of the debt funding, verified on the date of the accrual of the interest, shall not exceed two times the amount of the net equity of the Brazilian company.

For purposes of the calculation of the total debt funding, every form and term of financing shall be considered by the Brazilian company, regardless of the registry of the contract with the Brazilian Central Bank.

This rule also applies to debt funding transactions raised by Brazilian entities whereby the guarantor, legal representative or any intervening party is a related party abroad.

In case any excess is verified in what concerns the limits set in items I and II above, the exceeding interest will be considered an unnecessary and non-deductible expense in the calculation of the corporate income taxes.

Additionally, the new requirements for the tax deduction of the interest expenses do not exclude the existing deductibility requirement prior to the new rules, according to which the expenses and costs will only be tax deductible if they are necessary, usual and normal to the taxpayer’s activities.

Rules applicable to transactions under a privileged tax regime or carried out with parties domiciled in low-tax jurisdictions

Debt equity ratio: 0.3:1

Similar to the rules mentioned above, whenever the interest is credited or paid by a Brazilian source to any individual or legal entity resident, domiciled or organized in a low-tax jurisdiction or subject to a privileged tax regime according to Articles 24 and 24-A of Law 9,430/96, the amount of the debt funding meeting such specifications will have to observe a limit of 30% of the net equity of the Brazilian party, regardless of any effective equity participation held by the foreign party in the Brazilian entity.

In case any excess is verified in what concerns the limits of this case, the exceeding interest will be considered an unnecessary and non-deductible expense in the calculation of the corporate income taxes.

11.6. The new transfer pricing rules

For many years, the Brazilian transfer pricing system was ruled by Law 9430/1996. Nevertheless, such legislation frequently resulted in double taxation situations or in losses to the Brazilian taxpayer, since the rules set forth therein followed its own execution pattern, which was not in line with the international transfer pricing standards.

However, in December 2022, Provisional Measure n. 1,152 was issued, aiming at adapting the Brazilian transfer pricing system to international standards. In this sense, the main scope of this change was to align the Brazilian rules to the “arm’s length” principle and the international guidelines of the Organization for Economic Cooperation and Development (OECD).

In June 2023, the mentioned Provisional Measure was converted into Law 14.593/23 and the changes were definitely introduced into the Brazilian legal system.

In general terms, the referred rules will be applied in the determination of the IRPJ and CSLL calculation basis of legal entities domiciled in Brazil that perform controlled transactions with related parties abroad.

In this sense, the application becomes mandatory for all taxpayers at the beginning of 2024. By means of Normative Instruction 2,132/23, however, the Brazilian Federal Revenue Service provided for the early adoption of the new rules, in calendar year 2023.

11.6.1. The arm’s length principle

The arm’s length principle states that the terms and conditions of a controlled transaction have to be established in accordance with those that would be established between unrelated parties in comparable transactions.

The verification that the terms and conditions of a transaction are in accordance with the arm’s length principle is done through two actions: the delineation of the controlled transaction and the analysis of the comparability of the controlled transaction.

11.6.2. Definition of controlled transactions

For the application of the rules provided in Law 14,596/2023, controlled transaction covers any commercial or financial relationship established or carried out between two or more related parties, directly or indirectly, included contracts or arrangements in any form and series of transactions.

11.6.3. Concept of related parties

Law 14,596/2023 states that are considered related parties for purposes of the transfer pricing rules if at least one of them is subject to influence, directly or indirectly exercised by another party, which may lead to the establishment of terms and conditions in its transactions that differ from those that would be established between unrelated parties in comparable transactions. Thus, related parties are as follows:

the controlling company and its controlled companies;
the entity and its business unit, when this unit is treated as a separate taxpayer for corporate income tax purposes, including the parent company and its branches;
the affiliates;
the entities included in the consolidated financial statements, or that would be included if the final controlling company of the multinational group of which they are part prepares such statements if its capital were negotiated in the securities markets of their residence jurisdiction;
the entities, when one of them has the right to directly or indirectly receive at least 25% (twenty-five percent) of the profits of the other or of its assets in case of liquidation;
the entities that are directly or indirectly under common control or where the same quotaholder, shareholder or holder has 20% (twenty percent) or more of the net equity of each of them;
the entities where the same shareholders or quota holders, or their spouses, partners, blood relatives or similar, within the third level, have at least 20% (twenty percent) of the net equity of each of them; and
the entity and the individual that spouse, partner or blood relative or similar, within the third level, of a counselor, director, or controlling of that entity.

In addition, the controlled relationship between the parties will be characterized when one entity:

hold, directly or indirectly, individually or together with other entities, including due to the existence of voting agreements, rights that ensure to them a preponderance in the corporate resolutions or the power to elect or dismiss the majority of administrators of another entity;
directly or indirectly participates in more than fifty percent of the net equity of another entity; or
holds or exercises the power to directly or indirectly manage the activities of another entity.

11.6.4. Delineation of the controlled transaction

The delineation of the controlled transaction will be made based on the analysis of the facts and circumstances of the transaction, as well as on the effective conduct of the parties and the economically relevant characteristics of the transaction.

The contractual terms of the transaction, the functions performed by the parties of the transaction, the specific characteristics of the goods, rights or services that are the subject matter of the controlled transaction, the economic circumstances of the parties and the market in which they operate; the business strategies and other economically relevant characteristics will also be taken into consideration.

Moreover, the delineation of the controlled transaction will consider the options realistically available to each of the parties to the controlled transaction, in order to assess the existence of other options that could have generated more advantageous conditions for any of the parties and that would have been adopted if the transaction had been carried out between unrelated parties, including the non-performance of the transaction.

The controlled transaction may be disregarded or replaced in cases where it is proven that unrelated parties, acting in comparable circumstances and behaving in a commercially rational manner, considering the options realistically available to each party, would not have entered into the controlled transaction as outlined.

11.6.5. Comparability analysis of the controlled transaction

The comparability analysis will be performed to compare the terms and conditions of the controlled transaction with the terms and conditions that would be established between unrelated parties in comparable transactions, considering:

the economically relevant characteristics of the controlled transactions and of the transactions with unrelated parties;

the date when the controlled transaction and the transactions between unrelated parties were conducted, in order to ensure that the economic circumstances of the transactions that are intended to be compared are comparable;

the availability of information on transactions between unrelated parties, which allows the comparison of its economically relevant characteristics, aiming to identify the more reliable comparable transactions conducted between unrelated parties;

the selection of the best method and of the financial indicator to be examined;

the existence of uncertainties in the existing pricing or assessment at the moment of the execution of the controlled transaction and if such uncertainties were addressed as unrelated parties would have done under comparable circumstances, considering also the adoption of appropriate mechanisms

the existence and relevance of the group synergy effects

11.6.6. The application of the transfer pricing methods

The new legislation establishes the “best method rule”, which is nothing more than the choice of the most appropriate method for a given transaction, that is, the one that provides the most reliable determination of the terms and conditions that would be established between unrelated parties in a comparable transaction.

Thus, unlike what happened in the previous legislation, in which the taxpayer chose his preferable method, as of now it will be necessary to apply the most appropriate method.

In this scenario, the methods available in Law 14.596/23 are the following:

Comparable Uncontrolled Price Method – (CUP)
Resale Price Method (RPM)
Costs Plus Method – (CPM)
Transactional Net Margin Method- (TNMM)
Profit Split Method (PSM)
other methods

Comparable Uncontrolled Price Method – (CUP)

PIC consists of the evidence of the price or the value of the consideration of the controlled transaction with the prices or the values of the consideration of comparable transactions carried out between unrelated parties.

In addition, it will be considered the best method when there is reliable information on prices or consideration amounts resulting from comparable transactions conducted between unrelated parties unless it is possible to establish that another method is applicable in a more appropriate manner.

In relation to commodities, the PIC shall be considered the most appropriate method, unless it can be established that another method is more appropriately applicable, based on the analysis of variants such as facts, circumstances, functions and risks of the transaction.

Resale Price Method (RPM)

This methods consists in comparing the gross margin that an acquirer of a controlled transaction obtains from the subsequent resale made to unrelated parties to the gross margins obtained from comparable transactions conducted between unrelated parties;

Cost Plus Method (CPM)

Basically, it draws a comparison between the gross profit margin obtained on the supplier’s costs in a controlled transaction to the gross profit margins obtained on the costs in comparable transactions conducted between unrelated parties;

Transactional Net Margin Method- (TNMM)

This method compares the net margin of the controlled transaction with the net margins of comparable transactions between unrelated parties, both calculated on the basis of an appropriate profitability indicator

This method is often applied when analyzing the operational profit relative to an appropriate base, i.e., costs, sales and operating expenses that the taxpayer realizes in a controlled transaction.

It is also important to take into account the functional analysis (functions, assets, and risks), the comparability benchmark to be applied to the method, as well as the selection and calculation of the profit level indicator.

Profit Split Method (PSM)

This is the division of profits or losses, or part thereof, in a controlled transaction according to what would be established between unrelated parties in a comparable transaction, considering the relevant contributions analyzed in the form of functions performed, assets used and risks assumed by the parties involved in the transaction.

Thus, it is noted that this method aims to eliminate the effect over profits arising from special conditions performed or imposed in a controlled transaction, determining the division of profits that the independent companies would have aimed to obtain when engaging in a comparable transaction.

Its application must be based on the identification of the profits to be divided for related companies from intercompany transactions, as well as from the division of profits obtained jointly among related parties on an economically valid basis that would have been established in an independent transaction.

Other Methods

In addition to the methods set forth in the Law, other methods may be established since the alternative methodology adopted produces a consistent result with that which would be achieved in comparable transactions performed between unrelated parties.

In this case, it must be demonstrated by the transfer pricing documentation that the foreseen methods are not applicable to the controlled transaction, or that they do not produce reliable results, and that the other selected method is deemed more appropriate.

11.6.7. Transfer Pricing Adjustments

When the terms and conditions established in the controlled transaction diverge from those that would be established between unrelated parties in comparable transactions, the tax calculation basis will be adjusted in order to compute the results that would be obtained if the terms and conditions of the controlled transaction had been established according to the arm’s length principle. In these cases, the spontaneous adjustment (made by the Brazilian legal entity) or the primary adjustment (made by the Tax Authorities) will be used.

The compensatory adjustment will be made by the parties of the transaction until the closing of the calendar year in which the transaction was carried out to adjust the value to arm’s length.

11.6.8. Transactions with intangibles

Controlled transactions with intangible assets should be based on the arm’s length principle and economically relevant characteristics. Also, they should be measured based on the contributions provided by the parties, and, in particular, on the relevant functions performed in relation to the intangible and the economically significant risks associated with these functions. • The controlled transactions with intagibles must also observe the assets used, the risk control and the financial capacity of the taxpayer.

Furthermore, with regard to intangibles that are difficult to value, based on OECD rules, it is obligatory that the prices adopted reflect the uncertainties arising from the pricing or valuation of the intangible. It is also established that the uncertainties must be evaluated in the same way that independent parties would evaluate them in analogous situations. Finally, for this kind of intangible, tax parties can use data that becomes available after the controlled transaction for evidence purposes, subject to proof to the contrary, as to the existence of uncertainties at the time of the transaction.

11.6.9. Intragroup Services

The Law n. 14,596/23 considers the provision of services as “any activity developed by a party, including the use or provision by the provider of tangible or intangible assets or other resources, that results in benefits for one or more parties.”

The benefits necessary to configure intra-group services have to provide a reasonable expectation of economic or commercial value to the other party of the controlled transaction, in a way that independent parties would also be willing to adopt them.

11.6.10. Cost-sharing Agreements

Cost-sharing agreements contain a lot of tax contradictions in Brazil, due to the low legislative exploration of the topic. However, Law n. 14,596/23 brought some provisions that may give a more accurate guidance to taxpayers.

Based on the innovations brought by the Provisional Measure, it is understood that the contributions of the participants in the cost sharing agreement will be based on the “arm’s length” principle and proportional to their proportions in the total expected benefit, which will be evaluated by means of estimates of the increase in revenues, reduction in costs, or any other benefit that is expected to be obtained from the agreement. However, when there is disproportionality between contributions, compensation will be made among participants.

11.6.11. Business Restructuring

Law n. 14,596/23 defines business restructurings as modifications in the commercial or financial relations between related parties that result in the transfer of potential profit or in benefits or losses for any of the parties and that would be remunerated if they were made between unrelated parties.

In these cases, the compensation will be established based on the benefit or loss measured by the related parties.

11.6.12. Financial Operations

In financial transactions, it will be necessary to consolidate if the transaction will be treated as a debt or equity transaction. This distinction will be made based on the economically relevant characteristics of the transaction, the perspectives of the parties and the realistically available options.

In transactions understood as capital operations, interest and expenses will not be deductible from the real profit and from the CSLL calculation basis.

In transactions understood as debt operations, the remuneration of the creditor party will be defined based on the existence or inexistence of financial capacity, or on the possibility or impossibility of controlling economically significant risks.

In thin capitalization scenarios, the dynamics continues based on fixed coefficients for determining the volume of indebtedness.

11.6.13. Intra-group Guarantees

In the hypotheses of guarantee, it will be necessary to define if the performance will be delineated as: (i) service, in which case remuneration will be payable to the guarantor; (ii) partner activity or capital contribution, in which case no remuneration will be payable.

If remuneration is owed, the basis will be determined according to the benefit obtained by the debtor that outweighs the incidental benefit arising from the implicit group support, and may not exceed fifty percent of the amount, except when it is reliably demonstrated that another approach would be more appropriate.

11.6.14. APAs

The IRS will be able to conduct request for rulings about the methods that should be adopted by the taxpayer. However, if the information provided by the taxpayer shows flaws, the inquiry will lose its effect.

The inquiries will be valid for up to four years, and a fee of R$80,000.00 will be charged to institute the request.

A request can be made for an extension of the request for ruling validity for two more years, which may or may not be accepted by the authorities. The prolongation request will cost R$20,000.00.

11.6.15. Penalties

The penalties applicable to non-compliance with the new transfer pricing regime can consider: the value of the transaction, the value of the gross revenue or the value of the consolidated revenue of the multinational group. In any case, the minimum fine will be R$20,000.00 and the maximum R$5,000,000.00.

One of the main innovations brought by the Provisional Measure is the exemption from some penalties related to inaccurate, omitted, or incomplete information, as well as the possibility that formal errors or immaterial information duly proven have the penalty dismissed.

11.6.16. Mutual Agreement Procedure

In cases of results agreed in a dispute resolution mechanism provided in the scope of an international agreement or convention to eliminate double taxation of which Brazil is a signatory, the tax authority must review, ex officio, the assessment made in order to implement the agreed result in accordance with the provisions and purpose of the international agreement or convention.

11.6.17. Deductibility Restrictions

The new rules revoked the maximum limit of 5% for the deduction of royalties, technical, scientific, administrative or similar assistance. Thus, such items are now taxed under the general transfer pricing regime.

11.7. Thin Capitalization Rules

Rules applicable to transactions with related parties, except for transactions with parties subject to privileged tax regimes or domiciled in low-tax jurisdictions.

Debt equity ratio: 2:1

In case of the debt funding extended by a related entity abroad with corporate interest in the Brazilian company, the sum of the debt funding, verified on the date of the accrual of the interest, shall not exceed two times the amount of equity participation of the related foreign party in the net equity of the Brazilian company;

In case of the debt funding extended by a related entity abroad with no corporate interest in Brazilian company, the sum of the debt funding, verified on the date of the accrual of the interest, shall not exceed two times the amount of the net equity of the Brazilian company.

This rule also applies to debt funding transactions raised by Brazilian entities whereby the guarantor, legal representative or any intervening party is a related party abroad.

Rules applicable to transactions under a privileged tax regime or carried out with parties domiciled in low-tax jurisdictions

Debt equity ratio: 0.3:1

11.8. Interest on Equity

Law No. 9,249/95 determines that a Brazilian company subject to the actual profit regime may pay or credit interest on equity to its partners/shareholders and consider the corresponding expenses as deductible from the taxable basis of the IRPJ and CSLL, provided that the legal requirements are met.

The IOE to be paid or credited and deducted as an operational expense cannot exceed the following limits: 1) the amounts resulting from the application of the TJLP, pro rata die, over the company’s net equity accounts indicated in the legislation and 2) 50% of the net profits or 50% of the retained earnings, whichever is higher.

The IOE paid or credit is subject to the Withholding Income Tax (IRRF) at a rate of 15% (or 25% if the beneficiary is located in a low tax jurisdiction).

11.9. Withhold Income Tax (“IRRF”) in foreign payments – (services, royalties, interests)

The incomes, gains derived from capital and other revenues paid, credited, delivered, applied or sent, through resource placed in the Brazil, to the individual or to the legal entity domiciled abroad are subject to levy at withholding income tax (“IRRF”).

The quoted tax levies on the rates of:

(i) 15% on transactions not taxed according to the specific manner provided for in Law as well as on (a) the gains derived from capital concerning investments performed via foreign currency; ; (b) alimony and reserve funds; and (c) the awards obtained through competitive examination or competitions. Please refer to item 11.2.3 – Non-residents for the taxation applicable over the gains derived from capital assessed upon assignment of goods and rights.

(ii) 25%: (a) on the revenues proceeding from any transaction under which the beneficiary is resident or domiciled in country where the taxation system is subsidized and; (b) on the labor revenues, with or without employment relationship, or on the revenues regarding rendering of services.

It shall be noted that the services taxed by CIDE [Contribution for Intervening on Economic Domain], whose applicable rate is of 10%, are entitled to a reduction of the IRRF to 15%, unless the beneficiary of the remittances is located in a low-tax jurisdiction. In this case, IRRF will be levied at a 25% rate plus the CIDE at a 10% rate.

11.10. Social Contributions on Revenues (“PIS” and “COFINS”)

The Contribution for the Financing of Social Security (“COFINS”) and the Social Integration Program (“PIS”) shall be levied over the revenues received by the Brazilian legal entities, with the exception of few cases.

Laws Nos. 10,637/02 and 10,833/03 introduced the system for verification of PIS/COFINS [Social Integration Program/Contribution for Social Security], which applies to the major of the companies. The intent of the new legislation is to prevent the accumulation of this contribution by way of grant of tax credits. Nowadays, with few exceptions, PIS/COFINS levy on a combined rate of 9.25% (COFINS – 7.6% and PIS – 1.65%).

Under the non-cumulative system of calculation of PIS and COFINS, the taxpayer is entitled to the record the tax credit related to the contribution pursuing from the transactions of:

goods acquired for purposes of resale, excepting for those goods expressly referred to;
2. goods and services used as input for the rendering of services and for the production or manufacturing of goods or products addressed to sale, including fuels and lubricants;
3. electrical and heat powers, including steam Power, consumed in the legal entity’s establishments;
4. payment of leases of buildings, machines and equipment to companies for the use thereof in the company’s transactions;
5. amount of the considerations of commercial lease transactions of legal entity;
6. machines, equipment and other goods incorporated to the fixed assets acquired or manufactured to be leased to third parties or used in the manufacturing of goods intended for sale or in the rendering of services;
7. buildings and betterments in own real property or real property pertaining to third parties used in the corporate activities;
8. goods received in return;
9. storage of good and freight in the sale transaction, for cases (i) and (ii), when the burden is supported by the seller;
10. meal coupons, transportation and uniforms provided to employees by a company which explores activities of cleaning, conservation and maintenance services; and
11. goods incorporated to the intangible assets, acquired for the utilization in the production of goods destined to sale or in the rendering of services.

The credits may be used to reduce the PIS/COFINS that levy on the revenues of the company. This form does not apply to the cooperative organizations, immune or exempt companies, companies taxed by income tax based on the assumed or arbitrated profit, legal entities that have adopted the SIMPLES [Unified Tax Collection System], to the revenues arising out of rendering of telecommunication services, arising out of services of call center, telemarketing, phone collecting and phone services companies in general, to revenues arising out of software related services, among others.

The financial revenues, which were subject to a zero rate of PIS/COFINS as long as the taxpayer was under the non-cumulative system, begin to be subject to the 4.65% combined rate as from July 1st, 2015, as per Decree No. 8,426/15.

PIS/COFINS-Import

Law No. 10,865/04 introduced the taxation of PIS and COFINS on imported products and services. This law determines that PIS and COFINS are due in the entry of foreign goods in Brazil and in the payment, crediting, delivery, the use or remittance of amounts to foreign residents or domiciled abroad as payment for the services supplied.

The taxpayers thereof are all the importers and companies or individuals that contract the services of individuals or companies domiciled abroad. The general tax rates of the PIS and COFINS – Import contributions for imports of goods is 11.75% and the tax basis shall be the customs value of the imported goods. In the import of services, the applicable tax rate is 9.25% and the tax basis is the value paid, credited, delivered, employed or remitted abroad, before the deduction of the withholding income tax, plus the Municipal Services Tax (ISS) and the PIS and COFINS contributions.

11.11. Contribution for Intervention in Economic Domain (“CIDE”)

The Brazilian companies that hold licenses to exploit rights, purchasers of know how or parties to contracts that imply in the transfer of technology executed with non-residents and domiciled abroad are subject to CIDE taxation.

As of January 1, 2002 the CIDE contribution is also paid by companies that supply technical services, administrative assistance and other similar services, as well as by the legal entities that pay, credit, deliver, use or remit royalties, of any type, to beneficiaries resident or domiciled abroad.

The CIDE contribution is due over the amounts paid, credited, delivered, used or remitted, on a monthly basis, to non-resident beneficiaries, such as remuneration of the transactions above mentioned.

The payments for use license and rights for commercialization of software, in cases which do not involve technology transfer are not subject to CIDE.

The CIDE tax rate is of 10% and the taxpayer is the Brazilian legal entity. CIDE shall be collected on the last business day of the fortnight subsequent to the month in which the taxable event takes place.

11.12. Contribution for intervention in the economic domain (“CIDE”) over combustion fuels

This contribution is due over the import and sale of certain types of combustion fuels (petrol, diesel oil, aircraft kerosene and other types of kerosene, gasoline, liquefied petrol gas, including the by-products of natural gas, methanol and naphtha) in a fixed amount in Reais [Brazilian currency] pursuant to the measure unit adopted for each of the products susceptible to contribution.

The CIDE contribution is payable by the producer, mixer or importer of combustion fuels. In the domestic market, the taxpayer may deduct the amount of CIDE, paid in the export or commercialization, from the amounts of contribution for PIS/COFINS due in the commercialization, in the domestic market. The CIDE contribution is not due over the revenue that results from the exports of the aforesaid products.

11.13. Contribution for the Development of the Brazilian Cinematographic Industry (“CONDECINE”)

This contribution is due over the exhibition, production, licensing and distribution of movies and photography work in video with profit purposes, per market segment, and it is calculated based on the period of work on predetermined basis.

The contribution is also levied on the provision of services that might distribute, effectively or potentially, conditioned audiovisual contents and on the placement or distribution of advertising audiovisual material that is included in international programming and in which there is direct participation of a national advertising agency.

CONDECINE is also due at the tax rate of 11% on the amounts paid, credited, remitted, delivered or used by local agents to foreign producers resulting from the exploitation of audiovisual work in Brazil.

11.14. Export Tax (“IE”)

The export tax is due upon export transactions. The IE ad valorem tax rate is applied according to a limited product list and varies according to the type of product that is being exported.

11.15. Import Tax (“II”)

The import tax is due upon the clearance by customs of the imported products, according to an ad valorem tax rate. The tax rate varies according to the tariff classification of the imported product. Imports of products are also subject to IPI (Federal Excise Tax), ICMS (Sales Tax) (further addressed below) and PIS/COFINS-Import. These taxes, jointly with the import tax, are calculated as follows: the import tax is applied over the CIF price of the imported product; the IPI tax applies over the CIF price plus import tax; the ICMS tax applies over the CIF price, plus import tax, IPI tax, the PIS/COFINS-Import and the ICMS tax and the PIS/COFINS-Import applies over the CIF price.

11.16. Tax on the Circulation of Products and Services (“ICMS”)

The ICMS tax is a State tax that is due over the importation and circulation of goods and, also, the supply of interstate and intermunicipal transport and communication services.

The ICMS tax rates and tax benefits vary from State to State and depend on the type of transaction (e.g., intrastate or interstate sale of goods, communication or transportation services, etc.). In the State of São Paulo the most common tax rates currently are (i) 12% over transportation services; (ii) 18% over importation and circulation, within the State, of goods; and (iii) 25% over communication services.

The ICMS is due over imports by companies and individuals, even when not considered taxpayers for the purposes of ICMS payment, at a tax rate of 18%. The other tax rates may be applied depending on the product/service. The tax rates may also vary in interstate transactions (usually 7% or 12% depending on the state of destination of products and services, or 4% in case of imported goods or goods with imported content higher than 40%).

The ICMS system allows the taxpayer to offset the ICMS paid upon the purchase of products and services with the tax amount due in subsequent taxable transactions (e.g., sale of goods and services subject to ICMS tax). The difference amount such amounts shall consist of the amount due to the State.

As of 1 November 1996, importers/purchasers may be credited by the ICMS paid over imports and local purchases of fixed assets (which was prohibited up to 1 November 1996). Nevertheless, Supplementary Law No. 102/00 introduced a new system for the use of ICMS credits upon the purchase of fixed assets, according to which the taxpayer may record the aforesaid credits at a 1/48 monthly rate.

In regard to taxpayers that have excess of ICMS tax credit, some state laws establish alternatives that allow the taxpayer to transfer its credits. In the State of São Paulo, for example, the state law offers three options for the taxpayer that has an excess of ICMS tax credit to use the tax already paid (instead of offsetting same with ICMS debt), namely: (i) transfer of ICMS credits to any of its affiliates or offices established in the state of São Paulo, (ii) transfer the credits to an inter-dependent company, as defined by the law, or (iii) use the credits to pay suppliers of raw materials and/or certain fixed assets. Other state laws may establish other options for the use of ICMS credits.

11.17. Federal Excise Tax (“IPI”)

The IPI is a federal tax that is due over manufactured products upon the outflow from the establishment where they were manufactured. The IPI tax is also due over the import of manufactured products in the case of import of a product used as an input and its subsequent sale by the importer. The IPI tax rates vary according to the product’s essentiality.

The IPI is due in each stage of the manufacturing process of the industrialized products, and also in the import thereof. This tax is paid upon the purchase or import of raw materials and products, parts, intermediary components and packaging materials and may be offset in subsequent transactions.

11.18. Municipal Services Tax (“ISS”)

ISS is a municipal tax levied on the supply of any type of services, as defined in federal Supplementary Law (LC). This tax is currently governed by Supplementary Law (LC) No. 116/03. The rate of ISS varies between 2% and 5%.

ISS is due generally for the Municipality where the establishment rendering services is located. The following exceptions are determined in LC No. 116/03: civil construction, services acquired abroad, sweeping and collection of garbage services, treatment of effluents, environmental sewage, forestation, parking security, storage and amusement services.

As of January 2004 the ISS tax is due over the purchase of foreign services, the Brazilian beneficiary thereof being liable for the payment of the tax, in addition to its levy over exports of services when the results occur in Brazil (despite that the payment is made by a foreign resident).

11.19. Tax on Financial Transactions (“IOF”)

Decree No. 6,306/07 regulates the IOF and since its enactment suffered successive amendments in order to institute new tax rates.

With respect to IOF-credit, which applies to in case of credit transactions of any nature, the tax is due at the delivery moment of the value which shall constitute the obligation object, or at the moment it is made available for the interested party. Concerning the credit transactions with term and values determined, the IOF applies over the main loan at a tax of 0.0041% per day, in case of legal entity borrower, or of 0.0082% in case of an individual borrower, followed by a supplement of 0.38 %, totalizing maximum amount of, respectively, 1.87% and 3.37%.

For payments with undetermined terms, it also applies the tax rate of, respectively, 0.0041% and 0.0082% per day, for the legal entity borrower and individual borrower, followed by a supplement of 0.38 %, but there is a specific methodology of calculation to benefit the amount of the due tax.

The tax on the financial transactions is levied also on determined exchange transactions (“IOF-exchange”). Recently, for the majority of transactions in which the IOF-exchange is due, a tax rate of 0.38% applies.

Notwithstanding, the IOF-exchange falls upon the tax of 6% on loans assigned for non-resident to Brazilian companies which the date of settlement is less than 181 days and 6.38% in relation to exchange transactions carried out by credit card administrators to cover debts carried out by their clients in a foreign country. For income arising from export to due IOF-exchange rate is of 0%. In addition, a 0% rate applies to the inflow of funds to be invested in the Brazilian financial and capital market by non-residents.

With respect to loans granted by non-residents to Brazilian companies, Decree no. 10,997/2022, published on March 16, 2022, amended Decree no. 6,306/07 and reduced the rates of the “IOF-Exchange. This Decree established an immediate reduction from 6% to 0% of the rate of the IOF-Exchange levied on foreign exchange transactions of inflows of funds into the country as short-term loans (term of less than 180 days), as of March 19, 2022;

In other cases, the reduction in the IOF-Exchange rate will be gradual over the next few years. For example, transactions with credit cards, debit cards, traveler’s checks, and others abroad (such as at institutions participating in cross-border payment arrangements), currently subject to 6.38%, will be reduced by 1% per year as of February 1, 2023. On February 1, 2028 these transactions will be subject to IOF-Exchange at 0%.

Furthermore, it is expected that the IOF-Exchange rate will be reduced to zero for all transactions from 2029.

Decree 10,997/2022 came into force on March 19, 2022, and applies to exchange settlements carried out after this date.

In addition to the levy of IOF over credit and exchange transactions, this tax also is due over financial transactions related to insurances (mostly the tax is levied at a 7.38% rate), title deeds and real estate (with taxes that in the majority of transactions oscillate between 0% and 1.5%) and upon transactions with gold, financial assets, or exchange instrument, under the rate of 1%.

11.20. Tax on Urban Buildings and Property (“IPTU”)

IPTU is a Municipal tax that is levied on an annual basis, which tax rates are normally progressive, based on the use and appraised value of the real estate property.

11.21. Tax on the Transmission of Real Estate Property (“ITBI”)

ITBI is a Municipal tax levied over the transfer of real estate property. The tax rates may vary according to the real value of the transaction or the appraised value of the real estate, whichever is higher. Note that, in the Municipality of São Paulo, the tax authorities are allowed to update the appraised value of the real estate through market researches. In addition, in the Municipality of São Paulo, ITBI has a fixed tax rate of 3%. The ITBI tax is not due in the transfer of real estate property in the events of merger of companies or contributions for the paying up of the capital stock in cases where the taxpayer’s corporate objective is not related to the real state activity.

11.22. Tax on Transmission of Property Causa Mortis and Donations (“ITCMD”)

The ITCMD is a state tax levied on the transmission of chattels or real estate property by way of donation or death (inheritance). Currently, in the State of São Paulo, the ITCMD tax rate is 4% of the appraised value of the chattels or real estate or the transmission of rights.

(1) Article 258 of the Income Tax Regulations:Taxable Income is the net profit of the period of assessment adjusted by the additions, exclusions or compensations prescribed or authorized by RIR [Income Tax Regulations].

(2) The Brazilian Federal Revenue Department (“RFB”) has listed, for purposes of Brazilian taxation system, the jurisdictions considered as low-tax jurisdictions – the so-called “tax havens” – (Normative Instruction of SRF No. 1,037/10). Such countries include American Samoa, American Virgin Islands, Andorra, Anguilla, Antigua and Barbuda, Aruba, Ascension Island, Bahamas, Bahrain, Barbados, Belize, Bermuda Islands, British Virgin Islands, Brunei, Campione D’Italia, Cayman Islands, Cook Islands, Channel Islands (Alderney, Guernsey, Jersey, and Sark), Dominica, Curacao, Cyprus, Djibouti, Federation of Saint Christopher and Neveis, French Polynesia, , Gibraltar, Grenada, Hong Kong, Ireland, Isle of Man, Kiribati, Labuan, Lebanon, Liberia, Liechtenstein, Macao, Maldives, Malta, Mauritius Islands, Marshall Islands, Monaco, Monserrat Islands, Nauru, , Niue Islands, Norfolk Island, Occidental Samoa, Oman, Panama, Pitcairns Islands, Qeshm Islands, Santa Lucia, Saint Helena Islands, Saint Martin, Saint Pierre et Miquelon Islands, Saint Vincent & Grenadines, , Seychelles, Solomon Islands, Swaziland, Tonga, Tristan da Cunha, Turks & Caicos Islands, United Arab Emirates and Vanuatu.

In addition, the article 2 of the Normative Ruling No. 1,037/10 lists the “privileged fiscal regimes” such as certain regimes in Uruguay, Singapore, The Netherlands, Austria, among others.

(3) Normative Instruction No. 1,312/12 defines “similar property” as that containing, concomitantly: (i) the same nature and the same function as well; (ii) as the property susceptible to mutual compensation so as to hold the function whereto it has been planned; and (iii) equivalent specifications.

1- The Ministry of Finance reduced the percentage to 17% for the countries, dependencies and regimes that are aligned with the international standards of fiscal transparency, in the terms to be defined by the Brazilian Federal Revenue Department, notwithstanding the observance of the other conditions provided by Articles 24 and 24-A of Law 9,430/96.

Authors: Clarissa G. Machado, Juliana P. Assis, Marcelle Silbiger, Luiz Felipe Camargo and Steffania Scomparin

Trench, Rossi e Watanabe Advogados

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São Paulo – SP
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Email: [email protected]
Internet: www.trenchrossi.com.br

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Doing Business in Brazil

11.1. a 11.21. Taxation in general (taxes, fees and contributions)