Silvania Tognetti – Brasil, Pereira Neto, Galdino, Macedo ...

ttn.taxation.net

Silvania Tognetti – Brasil, Pereira Neto, Galdino, Macedo ...

The inward investment in Brazil

and international taxation

Silvania Tognetti


Objective

Identify main tax aspects to be considered

in all inward investments in Brazil that may

interfere in an international tax plan.


Assumptions

• Brazil expects 38 billions of direct investments in

Brazilian Companies in 2011.

• Financial and Tax Advisors, Banks and others

specialists in cross border transactions will be

involved in these transference of procedures.

• Great part of them will require a tax planning or

adjustments in a present tax planning. Or at least

decisions, like, who will be the controlled

shareholder in Brazil?

• In order to help clients, very basic aspects must be

considered in an international environment.


Main Areas to be considered

• Incorporation of companies in Brazil: branches,

subsidiaries, permanent establishments,

transparent structures (LLCs).

• Amortization of goodwill: IFRS and Risks.

• Capital structure: thin capitalization rules, limits

for deduction of interests, transfer pricing rules,

CFC rules in Brazil.

• Repatriation of profits: dividends, interests on

profits (“JCP”).

• Capital gain.


Incorporation of Companies

• Branches in Brazil depend on government

approval, therefore are rarely used.

• Permanent Establishment in Brazil is a concept

with limited application.

• The most common form adopted is the

subsidiary as a corporation (S.A.) or a limited

liability company (Ltda).

• There is not a transparent entity as a LLC in

Brazil.


Consequences for International

Sructure

• An international tax planning for investment in

Brazil will not reach its objective if includes

DTTs that depends on a branch in Brazil or a

Brazilian transparent entity or a Brazilian PE.

These concepts may cause more troubles than

advantages from a tax perspective.

• In some cases, an intermediary jurisdiction may

be a solution.


Amortization of Goodwill

• The amortization of goodwill is not dead with

the adoption of IFRS rules.

• For tax purpose, the accounting system is still

the one enforce before the IFRS rules.

However, nobody can assure for how long it will

continue this way.

• Besides that, Brazilian tax authorities are

learning fast about disregarding of tax planning

structures. So, the use of a holding as a vehicle

only to get the benefit of amortization can be

challenged in the future by tax authorities.


Consequence for International

Structure

• In the past, the decision for a structure including

the amortization of goodwill in a Brazilian

Subsidiary was automatic.

• In view of that, other alternatives were not

explored and in M&A transactions big write offs

previous to the acquisition were common.

• Deep studies on this are now necessary.


Capital Structure

• Brazil has introduced limitations for deduction of

interests from income tax basis (and also social

contribution on profit), when there is an excess of

debt, under certain parameters. It is not a prohibition

of thin capitalization.

• Interest from jurisdictions that don’t tax income or tax it

with rates lower than 20% (tax haven concept) or with

a special tax regime, may trigger rules of non

deduction of interest. These jurisdictions may also

bring special rules regarding transfer pricing.


Capital Structure II

• Instead of CFC rules, that shall apply in the

presence of certain aspects or circumstances,

Brazil adopted a general transparency method for

foreign controlled companies.

• If a Brazilian Subsidiary will have its controlled

companies, all profit generated outside Brazil will

be taxed in Brazil, but losses will not be offset

against profits in Brazil.


Consequences on International

Structure

• Decision about capital structure will include loans

from shareholders but also loans that may come

from other sources if they are in tax havens or

jurisdiction considered as “privileged tax regime”

by Brazilian authorities. It may include a supplier,

a Bank or a trust in tax planning structure.

• The capital structure must consider that there is a

tax consequence for foreign controlled companies

of Brazilian subsidiaries. Maybe special line of

investments for Brazil is the best choice.


Repatriation of Profits

• Dividend in Brazil are exempt. There is no WHT.

• Interest on Capital (JCP) can be considered as

dividends for some jurisdictions and DTTs, but in

Brazil it is taxed as interest.

• Interest on Capital can be deducted on income tax

basis of the Brazilian Subsidiary, but it is taxed for

the non resident.


Capital Gain

• In Brazil, investments must be registered within

the Central Bank of Brazil in a electronic system

(RDE). The amount registered will be used as cost

basis to be offset against the price received in the

sale or liquidation of investment to calculate the

capital gain.

• This calculation is made in Reais (Brazilian

currency), therefore, losses in US Dollars may not

guarantee no capital gain.

• In Brazil, there is capital gain income tax when an

asset in Brazil is transferred from a non resident to

another non resident.


Consequence on International

Structure

• Note that a restructure of companies outside Brazil

may trigger income tax on capital gain in Brazil, if

the asset in Brazil ( a Brazilian subsidiary or land)

is transferred (sale or contribution to the capital of

another company inside the same group of

companies) to another company).

• It is advisable to keep a sub holding abroad to

control investments in Brazil to avoid this type of

issue.


Conclusions

• Besides generic information regarding domestic

taxation some little differences observed in Brazil

may bring different strategies in international tax

planning.

• A Brazilian tax advisor will be needed for sure, but

now you will be able to skip some of the common

initial obstacles on structuring direct investments

in Brazil.


Obrigada!

Thank you!


Silvania Tognetti

silvania.tognetti@bpgm.com.br

SP + 55 11 3638-7013

RJ + 55 21 3077-3900

http://www.bpgm.com.br

Rio de Janeiro

Av. Rio Branco, 138 – 17º andar

Centro – 20040-002

Rio de Janeiro l RJ l Brasil

Tel. +55 21 3077 3900

Fax. +55 21 3077 3999

São Paulo

Rua Olimpíadas, 100 – 6º andar

Vila Olímpia – 04551-000

São Paulo l SP l Brasil

Tel. +55 11 3638 7000

Fax. +55 11 3638 7040

BSB

SAS Quadra 3 – Bl. C - 12o. andar Sls.

1203 a 1208 - Ed. Bus. Point

Brasília | DF lBrasil

Tel: +55 61 3221-1423

Fax: +55 61 3224-2471

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