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New Restrictions on Remittances to Tax Haven

9 Mar 2010

Brazil takes a step towards controlling the use of off shore companies to reduce and avoid taxes levied in Brazil. Taxand Brazil reviews the new restrictions, the conditions of the new measure and provides recommendations for multinationals.

Pursuant to Article 26, the amounts of any kind that are paid, credited, delivered, employed or remitted, directly or indirectly, by legal entities domiciled in Brazil to individuals or legal entities that are resident of or domiciled outside and submitted to the treatment of a tax favourable country or location, or that are under a favourable tax regime, shall be regarded, as a rule, to be non-deductible from the taxable bases of the corporate income tax (IRPJ) and Social Contribution on Profits (CSLL) of the Brazilian legal entity. An exception applies if the following conditions are cumulatively met:

  • Identification of the actual beneficiary of the entity domiciled outside Brazil, considering, as such, the individual or legal entity that has not been created with the sole or main purpose of tax savings and that earns the amounts on its own behalf, and not as an agent, trustee, or attorney-in-fact on behalf of a third party;
  • Proof the individual or legal entity is a resident of or domiciled outside Brazil and carries out transactions; and
  • Documentation proving that the price was paid and that the respective goods or rights were received, or that the respective services were used.

A relevant note on this matter is that definition of tax favourable country or location and the definition of favourable tax regime is still under dispute in Brazil. Taxpayers defend that it is limited to Brazilian black listed countries; however Brazilian Tax Authorities may use the legal definition and consider many other countries or locations to be included in those definitions using the list as a mere reference.

Taxand's Take

With this new rule, multinational companies should consider and disclose the actual beneficiary of a remittance. Multinationals must subsequently examine the requirements for the deduction. Taxand recommends multinationals seek tax advice on these cases to satisfy the ongoing debate regarding definitions of "tax favourable country (or location)" and "favourable tax regime".

Another consequence we've identified is the need to improve international trading structures conducted through tax havens. Therefore, adjustments to these structures should be reviewed to avoid non-deductibility.

Your Taxand contact for further queries is:
Silvania C. Tognetti
T: + 55 11 2179 4542

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