The inward investment in Brazil
and international taxation
Identify main tax aspects to be considered
in all inward investments in Brazil that may
interfere in an international tax plan.
• 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
• 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
Consequences for International
• 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
• 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.
• 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
• 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.
• 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
• 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
• 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
• Besides generic information regarding domestic
taxation some little differences observed in Brazil
may bring different strategies in international tax
• 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
SP + 55 11 3638-7013
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Rio de Janeiro
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