Historically, Brazil has always been a country that sought to strengthen and grow its domestic economy through public policies aimed at furthering multiple economic sectors.
This approach has grown even stronger over the last 30 years, driven by the goal of fulfilling the core purposes of the Federal Constitution set out in its Article 3: (i) building a free, fair, and supportive society; (ii) ensuring national development; (iii) eradicating poverty, and disenfranchisement, and reducing social and regional inequalities; and (iv) advancing the good of all, without any prejudice against origin, race, sex, color, age, and any other forms of discrimination.
And throughout all these years, the Brazilian Government has been responding to the great challenge of mitigating the income distribution gap and social inequality of its population, as well as spurring greater economic development in the North and Northeast regions of the country.
The efforts to generate employment and income and boost economic and social development fall within the purview of the National Regional Development Policy (PNDR), which, in addition to incorporating Regional Development Funds, has tax incentives earmarked for the Amazon and Northeast Regions.
Apart from such regional tax incentives intended to foster the sound development of certain industries or business activities, it also covers specific policies designed for actions relating to the culture in general, such as cinema and audiovisual production, sports, recycling, technological development, and infrastructure, which will be summed up as follows.
26.1. Regional Streamlining Projects and Activities
The Brazilian Government carried out a series of public policies aimed at promoting the development of less-developed regions, such as credit facilities and financing under special conditions (mainly alongside the Brazilian Development Bank – BNDES), as well as tax incentives for private investments, productive activities, and development initiatives.
The states of the Northeast Region (Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, and Bahia), the Legal Amazon (Acre, Amapá, Amazonas, Mato Grosso, Pará, Rondônia, Roraima, and Tocantins), and the northern part of the States of Minas Gerais and Espírito Santo are considered less developed.
The projects established in these regions may have facilitated credit facilities, and be eligible for tax incentives, typically linked to (i) infrastructure (power, telecommunications, transport, gas, basic sanitation, and water supply), (ii) tourism, including hotel real estate developments, and convention centers, (iii) agribusiness (irrigated agriculture, fruit farming, fish farming, and aquaculture), (iv) mineral extraction industry, (v) manufacturing industry, (vi) electronics, mechatronics, computer, biotechnology, automobiles and auto parts, and microtechnology.
Among the tax incentives, for companies opting for Taxable Income, and conducting business in one of the areas of scope of the Superintendence for the Development of Brazilian Northeast (SUDENE) or the Superintendence for the Development of Brazilian Amazon (SUDAM), there is (i) a 75% reduction in income tax, including surtax, for projects earmarked for the implementation, streamlining, expansion or diversification of undertakings in these regions, approved until December 31, 2028, under Law 14753/2023, and (ii) the possibility of reinvesting 30% of the income tax owed, in projects for streamlining or supplementing equipment until December 31, 2028.
26.2. REIDI – Special Incentive Regime for Infrastructure Development
REIDI (Law 11488/2007 and Decree 6144/2007) is targeted at reducing the tax burden levied on the implementation of infrastructure projects in the transport, port, power, sanitation, and irrigation industries, and consists of suspending the levy of contributions to Social Integration Program (PIS) (1.65%) and Contribution for Financing Social Security (COFINS) (7.6%) on revenues arising from the purchases below when earmarked for use or incorporation in infrastructure works relating to the fixed assets of legal entities qualified under the special regime:
1 – sale of new machinery, apparatuses, instruments, and equipment, purchased by a legal entity qualified under the regime;
2 – sale of construction materials, when purchased by a legal entity qualified under the regime;
3 – provision of services, by a legal entity established in the country, to a legal entity qualified under the regime;
4 – lease of machinery, apparatuses, instruments, and equipment procured by a legal entity authorized under the regime.
26.3. Artistic and Cultural Activities
National Culture Support Program (PRONAC)
Created by Law 8313/1991, also known as Rouanet Law, it is intended to incentivize cultural projects as concerns the display, use, and public circulation of cultural goods.
Incentives will be granted to cultural projects that are made available, whenever technically possible, and also in accessible-format copies intended for people with disabilities.
Granting incentives for works, products, events, or others arising therefrom, is not allowed when they are earmarked for private circuits or collections.
It essentially creates two tax benefits:
(A) Authorization to deduct the total funds spent on the approved project from the Legal Entity Income Tax (IRPJ) base; and
(B) Authorization to allocate part of the Legal Entity Income Tax (IRPJ) owed for these activities
It should be born in mind that, in the case of a legal entity, the benefit applies only to those opting for Taxable Income, and that the incentive is limited to 4% of the Income Tax owed. In the case of individuals, the incentive is limited to 6% of the Income Tax owed.
Normative Instruction 2/2019 establishes the procedures for raising funds relating to tax incentives, which apply only to projects not yet approved, in the following conditions:
(A) Individual Entrepreneurs (EI), with the tax treatment of Individual Micro-Entrepreneurs (MEI), and natural persons, may have up to four (4) active projects, amounting to BRL 1,000,000.00;
(B) For other classifications of Individual Entrepreneurs (EI), the limit of eight (8) active projects, amounting to BRL 6,000,000.00;
(C) Limited-Liability Proprietorships (EIRELI), Limited-Liability Companies (LTDA), and other legal entities may have up to sixteen (16) active projects, amounting to BRL 10,000,000.00;
(D) Subject to the exceptions above, the amount approved for funding per project is limited to BRL 1,000,000.00.
These caps can be expanded by 100% for projects accomplished entirely in the North, Northeast, and Midwest regions, and by 50% for projects carried out in the South region, and in the States of Minas Gerais and Espírito Santo.
The legislation establishes specific caps for audiovisual projects, such as TV shows, games and electronic applications, and web series, ranging from BRL 15,000.00 to BRL 600,000.00.
After completion of a project in digital format, the deadline for assessing its outcomes is one year, extendable for another year.
In projects with funding above BRL 750,000.00, in the event of evidence of improper investment or misuse of public funds or when there is a complaint of unlawfulness, there will be a thorough financial analysis of the project. In other cases, the analysis will be performed in a simplified way, based on the cross-check of bank statements.
Audiovisual Law
Created by Law 8685/1993, it is targeted at incentivizing the production and distribution of Brazilian independent audiovisual works, namely short, medium-length, and feature-length films, as well as technical infrastructure projects linked to the production and screening of films and phonographs, such as renovation of screening rooms, as well as projects for renovation and adaptation of properties intended for image & sound technical services.
The benefits provided for in the Audiovisual Law essentially take form as:
(A) Deduction from the Income Tax owed of the amounts invested in the production of cinematographic works and relevant projects of screening, distribution, and technical infrastructure, being entitled to a deduction of total invested as operating expense;
(B) Deduction from the Income Tax owed of amounts invested in sponsoring the production of Brazilian independent cinematographic works, and relevant audiovisual projects of screening, distribution, and technical infrastructure;
(C) Discount of 70% of the Income Tax owed on the remittance of funds abroad to producers, distributors, or intermediaries overseas, such as income arising from the exploitation of foreign audiovisual works, as well as compensation of rights pertaining to the transmission, through the broadcasting of sounds and images, and subscription mass electronic communication services, relating to audiovisual works or even events, including sports events.
It is worth bearing in mind that incentives cannot be used for the production of audiovisual works of an advertising nature.
Following federal guidelines, several Cities and States have legislation that incentivizes the use of Municipal Services Tax (ISS) and Tax on the Circulation of Goods and Services (ICMS), respectively, in cultural and artistic production projects. Given its relevance, it is worth mentioning the cultural incentive instituted by the State of São Paulo through the Cultural Action Program (Paulista Law 12268/2006, and Decree 54275/2009), which offers the ICMS taxpayer of the State of São Paulo the opportunity to sponsor artistic and cultural production in São Paulo, financially supporting projects accredited by the State Culture Department, through the allocation of part of ICMS amount to be paid, up to a cap of 3%.
26.4. Sports Activities
Sports Incentive
Created by Law 11438/2006, it allows, until and including the calendar year of 2027, the deduction of income tax owed by individuals or legal entities, opting for Taxable Income, from the amounts spent as sponsorship or donation in direct support to sports and parasports projects, previously approved by the Ministry of Citizenship.
As for legal entities, the amounts spent cannot be deducted from the tax base of Taxable Income and Social Contribution on Profit (CSLL), and deduction will be limited to 2% of the Income Tax owed. As for individuals, the deduction is limited to 7% of the Income Tax owed in the Annual Tax Return.
26.5. Recycling Activities
Incentive for Recycling Projects
Created by Law 14260/2021, it aims to incentivize industries and entities dedicated to the reuse, treatment, and recycling of solid waste produced in the domestic territory.
Basically, it allows, until the year 2027, the deduction of income tax owed by individuals or legal entities, opting for Taxable Income, from the amounts spent on projects relating to the activity, and previously approved by the Ministry of the Environment.
As for legal entities, the amounts spent cannot be deducted from the tax base of Taxable Income and Social Contribution on Profit (CSLL), and deduction will be limited to 1% of the Income Tax owed, together with the deductions pertaining to the sports incentive (Law 11438/2006).
As for individuals, the deduction is limited to 6% of the Income Tax owed in the Annual Tax Return, coupled with the deductions relating to the sports incentive (Law 11438/2006).
26.6. Technological Development
Lei do Bem
Created by Law 11196/2005 and regulated by Decree 5798/2006, it is the main instrument for fostering research, development, and technological innovation activities, as it covers all economic sectors and regions in Brazil.
Basically, it allows legal entities, to opt for Taxable Income:
(A) To deduct from the net income, to ascertain the Taxable Income and the tax base of the Social Contribution on Net Income (CSLL), the total amount of investments made, over the assessment period, in technological research and innovation development, classifiable as (i) operating expenses by the legislation of the Legal Entity Income Tax (IRPJ), (ii) payments for carrying out projects in Brazil contracting universities, research institution, or independent inventors, or (iii) transfer of amounts to small and very small businesses, which will be used in the performance of technological research activities. The deduction of research and development expenses will meet the following percentages: (i) 60%, by exclusion, which may reach up to 80% owing to the number of hired researcher employees; (ii) plus 20% of the payments linked to patents granted or cultivar registration.
(B) To reduce the Tax on Manufactured Products (IPI) by 50% in the procurement of goods earmarked for RD&I;
(C) To carry out the full accelerated depreciation of new assets earmarked for RD&I;
(D) To carry out the accelerated repayment of intangible assets for RD&I; and
(E) To reduce to zero the Withholding Income Tax (IRRF) rate on remittances of financial resources abroad for registering and maintaining trademarks, patents, and cultivars.
26.7. Export of Goods
Owing to the need to improve the domestic surplus, the Brazilian Government has always incentivized exports with various public policies. Exporting companies have a wide financing network, each with their costs and terms so that Brazilian goods and services can be competitive abroad, achieving the intended level of promotion.
It is worth mentioning the specific credit facilities to foster the export of agricultural and farming products, as well as services relating to engineering and civil construction, which have stood out in the international scenario with infrastructure works and projects, especially in Latin America.
Also important is the constitutional provision regarding the exemption of ICMS and IPI in operations that send industrialized products abroad, as well as the non-incidence, as provided for in the nonconstitutional law, for primary and semi-finished products sent abroad.
Income from exports is exempt from social contribution to PIS, as well as from the Social Contribution for Social Security Financing (COFINS).
Exporting companies are also entitled to the maintenance of IPI and ICMS tax credits generated owing to the purchase of feedstock, intermediate products, and materials purchased in the domestic market, as well as to refunds of the PIS and COFINS amounts paid in the purchase in the domestic market of inputs used for the production of the exported product.
In turn, exports of services abroad are also exempt from the levy of ISS, except for services developed in Brazil, with outcomes also taking form in the country, even if the payment for the provision of services is made by a resident abroad.
Lastly, we call attention to the companies installed in the so-called “Export Processing Zones – EPZs,” which are exempt from income tax on remittances and payments made, in any capacity, to persons residing and domiciled abroad.
EPZs are industrial districts created for the establishment of companies mainly focused on the foreign market, which operate on a special tax, foreign exchange, and administrative regime vis-à-vis other companies in Brazil, and gross 80% of their revenues in the foreign market.
Only companies focused on the production of goods to be marketed abroad, and with projects yielding exports effectively additional to those carried out by other companies outside it, and that contribute to Brazil’s economic, industrial, and social development, may be established in EPZs.
26.8 – Manaus Free Trade Zone
The Manaus Free Trade Zone is a free trade area for import and export, with special tax incentives, located in an area of 10,000 km2, which covers part of the Amazonas State’s Capital, Manaus, as well as the state’s cities of Rio Preto da Eva, and Itacoatiara.
At any point in that area, the company will be entitled to tax incentives from the Manaus Free Trade Zone, either for internal marketing or for the sale of its output. The basic requirement for the enjoyment of tax incentives, which concerns only internal consumption operations, is registering with the Superintendence of the Manaus Free Trade Zone (SUFRAMA).
In addition to the exemption from the Tax on Imports (II) and Tax on Manufactured Products (IPI), considering the logic that domestic sales to the Manaus Free Trade Zone are equivalent to exports abroad, the following incentives apply:
- Reduction to zero of PIS/COFINS on domestic or nationalized goods, inputs, or machinery;
- Reduction to zero of PIS/COFINS – Import, on inputs and machinery for the industry;
- Exemption from ICMS on domestic goods for consumption, and industrialization;
- Maintenance of ICMS credits for the supplier of feedstock, secondary material, and packaging;
- Presumptive ICMS credit for marketing or industrialization in the Manaus Free Trade Zone;
- Deferral of ICMS on import.
If an industrial legal entity has as its purpose the trading of production earmarked for other parts of the domestic territory, a technical/economic project covering its products has to be submitted with a Mercosur Common Nomenclature (NCM) that has an associated Basic Production Process (PPB), in addition to maintaining its registration in good standing.
In addition to the benefits already referred to, if the company has a project approved by the Amazonas State Government, the so-called stimulus credit (crédito estímulo) will also be applied on the ICMS assessed, for a 55% to 100% ICMS-targeted tax cut.
Moreover, there will also be tax benefits applicable to projects considered a priority throughout the Legal Amazon that apply for such benefits with SUDAM, as already mentioned in topic 26.1 (above), upon submission of a project.
Authors: Frederico Cunha and Marco Favini
De Vivo, Castro, Cunha e Whitaker Advogados
Rua Leopoldo Couto de Magalhães Jr., 758
9º e 10º andares – Itaim Bibi
04542-001 São Paulo – SP
Tel.: (11) 3048 3266
E-mail: [email protected]
Internet: www.devivocastro.com.br