Brazil: Brazilian Tax Review – April 2019

Important Developments in Brazil's Double Taxation Convention (DTC) Network

There have been important Developments in Brazil's DTC network in the last month.

In a nutshell, Brazil and Poland are negotiating a DTC aiming to facilitate trade and economic relations between the countries, which currently face obstacles.

Moreover, Brazil and Chile are revising their DTC in order to align it with the BEPS Project's minimum standards. The protocol of amendment is still under negotiation and has not been signed yet.

In addition, Brazil and Sweden have signed a protocol of amendment to their DTC, modifying several topics, such as withholding tax reductions to some specific incomes. The protocol still has to be approved by the Brazilian Congress and, afterwards, to be promulgated by a presidential decree in order to become effective.

Finally, the Brazilian Congress has recently published Legislative Decree 8/2019, which approved the protocol of amendment to the double tax treaty between Brazil and Denmark. The Protocol still has to be promulgated by a presidential decree in order to become effective.

Federal Revenue Office States that Payments for Technical Services Are not Subject to WHT under Brazil-France DTC

With a few exceptions, most of the DTCs signed by Brazil qualify payments for technical services as "royalties" instead of "business profits," which grants the right to tax to the source country.

The recent Private Ruling 2,004/2019 states that the Brazil-France DTC is one of those rare exceptions that does not qualify payments for technical services as "royalties," but as "business profits," so that withholding income tax does not apply when a Brazilian resident pays service fees to a French resident.

Court Authorizes Retroactive Payments of Interest on Shareholder Equity

The Federal Court of the 3rd Region ruled in favor of taxpayers, in line with the Superior Court of Justice, in lawsuits challenging retroactive payments (related to past fiscal years) of interest on shareholder equity, allowing it to be deducted from corporate income taxes.

These decisions diverge from the Brazilian Federal Revenue Office and the Administrative Tax Tribunal (CARF) positions and may represent relevant savings for the taxpayers.

Payments for Participation in Cultural Events Held in Brazil by Non-Residents Are Subject to the WHT

Under Brazilian legislation, remittances abroad for educational, scientific and cultural purposes are not subject to the withholding income tax.

In this context, the Brazilian Federal Revenue Office has issued Private Letter Ruling 70/2019, clarifying that this exemption only applies to payments made to cover the expenses of the Brazilian residents at events held abroad.

Therefore, according to the tax authorities, payments for the participation of Brazilian residents in cultural events organized by non-residents and held in Brazil are subject to the withholding income tax.

Courts Deem that Export Revenues Are Exempt from Foreign Exchange Tax ("IOF-Câmbio")

Tax authorities have stated, by means of Private Letter Ruling 246/2018, that export revenues received at a foreign bank and immediately sent to Brazil were exempt from IOF-Câmbio. On the other hand, if the remittances were made after some time, these transactions would be subject to the IOF-Câmbio tax.

In spite of the tax authorities' understanding, the courts have entered decisions favorable to taxpayers, arguing that there is no legal provision binding the IOF-Câmbio exemption to the moment the revenues are transferred to Brazil. Thus, tax authorities must apply the exemption according to these decisions, even if the export revenues are not immediately transferred to Brazil.

Federal Revenue Office States that PIS/COFINS-Import Must be Levied on Insurance Premiums Paid to Non-Residents

PIS/COFINS-Import are social contributions levied on the import of goods and services. Therefore, the incidence of such taxes on other transactions that are usually compared to service provisions, such as licensing intangibles, has always been a controversial matter.

In this context, the recent Private Letter Ruling 47/2019 states that premiums paid to non-resident insurance companies are subject to PIS/COFINS-Import. This interpretation might be challenged by taxpayers in court, arguing that insurance should not be considered a service provision, so PIS/COFINS-Import should not apply.

Federal Revenue Office Qualifies Debt Forgiveness as Financial Income for PIS and COFINS Purposes

Brazilian legislation states that "general revenues" must be taxed by PIS and COFINS at a 9.25% overall rate, whereas the financial revenues are levied at a 4.65% jointly rate.

Originally, the Federal Revenue Office had issued a Private Letter Ruling stating that debt forgiveness should be considered "general revenue," being taxed at a 9.25% PIS and COFINS rate.

However, this interpretation was recently modified. In a new private letter ruling, tax authorities stated that debt forgiveness related to bank loans should be classified as financial revenues and, thus, be subject to a 4.65% PIS and COFINS overall rate, which is a more favorable rate.

Administrative Tax Tribunal Held that Social Security Contribution Should Not Be Levied on Hiring Bonuses

In a recent decision, the Administrative Tax Tribunal (CARF) held that hiring bonuses paid by companies to newly hired executives, prior to the provision of services, should not be subject to social security contributions.

Originally, a tax audit had assessed a Brazilian company, claiming that hiring bonuses should be considered an advance payment on salary and, as such, subject to the social security contribution. However, the Administrative Tax Tribunal cancelled this assessment and held that hiring bonuses are in the nature of an indemnity and not a salary, meaning they are not subject to the social security contribution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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