magazine

DUTCHAM MAGAZINE
Good and Bad News From the (Bilateral) Tax Front
The Embassy of the Federative Republic of Brazil informed that, on December 9th 2015, the Law 13.202
entered into force, expanding the tax relief coverage granted by the Brazilian Government through double
taxation agreements, including the one with the Netherlands. In accordance with Article XI of the Law
13.202/15, “international agreements and conventions concluded by the Government of the Federative
Republic of Brazil to avoid double taxation of income include the CSLL”.
Therefore, the Brazilian tax authorities have recognized that, in addition to the Corporate Income Tax
(IRPJ), already regulated by the double taxation agreement, the “Social Contribution on the Net Profit” (CSLL)
is also covered.
CSLL is charged separately form the IRPJ. The tax basis of the CSLL is the net profit specifically
calculated for its payment purposes. The Social Contribution is levied on the legal persons and entities subject
to the law of income tax, and it is intended to finance the social security system.
Unfortunately, however, there was little time to celebrate:
On Monday December 28, 2015, the Brazilian Federal Revenue published Executive Declaratory Act
No.3 of December 18th, 2015, which has reframed (non-substantial economic activity carrier) Dutch holding
companies into privileged tax regime, the “grey list”, provided by Brazilian Federal Revenue Normative
Instruction No. 1.037/10.
Dutch holding companies were included into the original grey list early in 2010, but that inclusion was
suspended in June 2010 after the Dutch Government requested reconsideration. The Brazilian Tax Authorities
now claim the Dutch Government failed to provide a justification for not listing Dutch holding companies as PTR
(Privileged Tax Regime) benefitting.
The above will have, among others, the following consequences:
i) Applicability of Brazilian transfer pricing rules on transactions with Dutch holding companies,
irrespective of whether or not they have controlling relationship with Brazilian company; and
ii) Applicability of Brazilian thin capitalization rules (limit of 30% of debit in comparison with net equity).
In short: Apart from the bureaucracy required to gather documents proving the “ultimate beneficiary
shareholders”, Dutch companies may now also encounter the requirement to prove to have “substantial
economic activity”.
The latter may sound easy for all companies that are not mere “PO BOX companies”, but may just not
be so simple: Many Dutch companies are part of a large group with many local limited liability subsidiaries
(“BVs”), having one big mother company as umbrella.
Such structure may have advantages such as, for example, flexible remunerations linked to results for
each separate group department, the delegation of liabilities, and other aspects.
The organization scheme of some Dutch groups therefore resembles a “Christmas Tree”.
Dutch tax authorities indirectly stimulate that by allowing groups to make single consolidated declarations
on behalf of the whole group.
And that is where we find a contrast with the Brazilian tax authorities, which not only require identified
legal responsible managers and bookkeepers for every single company, but also oblige all companies, even
belonging to the same mother company, to do business with each other on the basis of (taxable) invoices.
Dutcham advises Dutch investors and exporters, for that matter, to operate from legal structures with
“flesh on the bones”, rather than small paper subsidiaries.
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