On June 4, 2010, the Secretary of the Brazilian Federal Revenue Office (Receita Federal do Brasil – RFB) issued RFB Normative Instruction nº 1037, which contains an updated list of favored taxation countries (países com tributação favorecida) formed by the so-called "tax haven countries" (paraísos fiscais)1. The new list is in full force and effect as from June 7, 2010, date of its publication in the Official Gazette of the Union (Diário Oficial da União – DOU)
For the purpose of this list (which is deemed to be a "black-list"), the Brazilian tax authorities included the countries or dependencies that, according to the Brazilian Government, do not impose tax on income or, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum), as well as whose national legislation does not allow access to the information regarding the capital stock structure or ownership of the legal entities organized under the laws of any such jurisdiction. The current list comprises the following jurisdictions: (i) Andorra; (ii) Anguilla; (iii) Antigua and Barbuda; (iv) Netherlands Antilles; (v) Aruba; (vi) Ascension Island; (vii) The Commonwealth of The Bahamas; (viii) Bahrein; (ix) Barbados. (x) Belize; (xi) The Bermuda Islands; (xii) Brunei; (xiii) Campione d`Italia; (xiv) Channel Islands (Alderney, Guernsey, Jersey and Sark); (xv) Cayman Islands; (xvi) Cyprus; (xvii) Singapore; (xviii) Cook Islands; (xix) Costa Rica; (xx) Djibouti; (xxi) Dominica; (xxii) United Arab Emirates; (xxiii) Gibraltar; (xxiv) Granada; (xxv) Hong Kong; (xxvi) Kiribati; (xxvii) Labuan; (xxviii) Lebanon; (xxix) Liberia; (xxx) Liechtenstein;; (xxxi) Macau; (xxxii) Madeira Island; (xxxiii) Maldives; (xxxiv) Isle of Man; (xxxv) Marshall Islands; (xxxvi) Mauritius Island; (xxxvii) Monaco; (xxxviii) Montserrat Island; (xxxix) Nauru; (xl) Niue Island; (xl) Norfolk Island (xlii) Panama; (xliii) Pitcairn Islands; (xliv) French Polynesia; (xlv) Qeshm Island; (xlvi) American Samoa; (xlvii) Eastern Samoa; (xlviii) San Marino; (xlix) Saint Helena Island; (l) Saint Lucia; (li) The Federation of Saint Kitts and Nevis2; (lii) Saint-Pierre and Miquelon Island; (liii) Saint Vincent and the Grenadines; (liv) Seychelles; (lv) Solomon Islands; (lvi) The Kingdom of Swaziland; (lvii) Switzerland; (lviii) The Sultanate of Oman; (lix) Tonga; (lx) Tristan da Cunha; (lxi) Turks and Caicos Islands; (lxii) Vanuatu; (lxiii) U.S. Virgin Islands; (lxiv) British Virgin Islands.
The novelties in relation to the former list of 2002 are Switzerland and the following additional offshore jurisdictions: Ascension Island, Brunei, Kiribati, Norfolk Island, Pitcairn Islands, French Polynesia, Qeshm Island, Saint Helena Island, Saint-Pierre and Miquelon Island, Solomon Islands, The Kingdom of Swaziland and Tristan da Cunha. Luxembourg was eliminated from this list and included as a privileged fiscal regime, as commented below.
The main consequence is that the listed countries and dependencies are subject to a higher withholding income tax rate on the remittance abroad of capital gains and of the remuneration due for rendering of services, which is equivalent to 25%. For countries in jurisdictions which do not fall into this category, the applicable rate is only 15%. The same rates are valid in the case of payment of interest on net equity (juros sobre capital próprio) for both situations. The tax exemption applied to income earned in Brazilian Private Equity Funds (Fundos de Investimento em Participação – FIPs) is not applicable.
The current applicable taxation rules for investments in the Brazilian financial and capital markets must also be observed. In the case of foreign investors, these rules may be summarized as indicated herein. There is an income tax withheld at source at the following: (i) for stocks, futures and listed options, public securities: zero rate; (ii) for funds and over-the-counter (OTC) derivatives: 10%; and (iii) for interest and capital earnings: 15%. Only for investors with head offices in favored taxation countries or dependencies, the applicable tax rate is established by the same rules applied to Brazilian residents, as follows: (a) period of up to 180 days: 22.5%; (b) period from 181 days up to 360 days: 20.0%; (c) period from 361 days up to 720 days: 17.5%; and (d) period above 721 days: 15%. There is also the tax on financial operations (IOF) for all investors at the following rates: (a) for short term investments, charged on fixed income earnings for applications of less than 30 days; decreasing rates from 96% to zero, according to the period of application; (b) 2% rate applied to entry of variable income and fixed income foreign investments; and (c) 1.5% rate on fixed income financial investment, National Treasury bonds and Depositary Receipts (DRs).
Furthermore, for the first time the RFB also identifies the entities which are subject to the concept of "privileged fiscal regime" (regime fiscal privilegiado)3 and must obey the Brazilian transfer pricing rules. These rules basically require the adjustment of the revenues and expenses in transactions entered into between related parties4, when there is over-invoicing or under-invoicing related to import and export operations, in order to avoid that part of the profit of the Brazilian company that normally would be taxed in Brazil if the transaction was structured otherwise be transferred to another foreign company based in a favored taxation country or dependency or is deemed to be subject to a privileged fiscal regime with the sole and exclusive purpose of saving the corresponding Brazilian tax. The same principle also applies if the transaction involves an unrelated company, i.e. a foreign legal entity without any formal relationship with the Brazilian company, but is made with the same purpose (avoid the payment of the corresponding Brazilian tax).
In addition, Brazilian thin capitalization rules established by Provisional Measure nº 472, of December 15, 2009, must be duly observed. This means that in the case of intercompany loans between a foreign legal entity which is domiciled in a favored taxation country or dependency or is deemed to be subject to a privileged fiscal regime, as lender, and a Brazilian company, as borrower, the interest paid by the Brazilian borrower to the foreign lender will only be deductible for income tax purposes if the debt/equity ratio of the Brazilian borrower does not exceed 30% of its net worth value.
Therefore, under the current legislation, the foreign companies subject to a privileged fiscal regime are only adversely affected by the transfer pricing and thin capitalization rules outlined above, which also apply to the companies with head offices in favored taxation countries or dependencies.
Normative Instruction 1037/2010 classifies as privileged fiscal regime:
in the case of Luxembourg, the regime applied to the entities incorporated in the form of holding company (Luxembourg Holding Company);
in the case of Uruguay, the regime applied to the entities incorporated in the form of Sociedad Financiera de Inversion (SAFI), which is the Uruguayan Financial Service Corporation which will exist until December 31, 2010;
in the case of Denmark, the regime applied to the entities incorporated in the form of holding company (Danish Holding Company);
in the case of Netherlands (Holland), the regime applied to the entities incorporated in the form of holding company (Dutch Holding Company);
in the case of Iceland, the regime applied to the entities incorporated in the form of International Trading Company (ITC);
in the case of Hungary, the regime applied to the entities incorporated in the form of the offshore KFT, which is the acronym for Korlátolt Felelõsségû Társaság (the Hungarian Limited Liability Corporation);
in the case of the United States of America, the regime applied to the entities incorporated in the form of Limited Liability Company (LLC) whose equity participation is formed by non-residents, which are not subject to the US federal income tax, such as Delaware, Nevada, Florida and other US states which adopt a similar regime;
in the case of Spain, the regime applied to the entities incorporated in the form of Entidad de Tenencia de Valores Extranjeros (ETVE), which is the International Spanish Holding Company; and
in the case of Malta, the regime applied to the entities incorporated in the form of International Trading Company (ITC) and International Holding Company (IHC).
It is important to bear in mind that the list and classification contained in Normative Instruction 1037/2010 can be reviewed by the RFB at any time for the purpose of including other jurisdictions either as a favored taxation country or dependency and/or in the category of privileged fiscal regime, at the discretion of the Brazilian Government.