Brazil

Corporate - Significant developments

Last reviewed - 03 August 2021

The Brazilian tax authorities interpret non-defined terms within a tax treaty with France

On 30 June 2020, the Federal Brazilian Tax Authorities (RFB) published Solução de Consulta - Cosit 49/2020 (dated 22 June 2020), providing that the double tax treaty (DTT) concluded between Brazil and France is not applicable to the territory of French Polynesia, given that ‘overseas collectivities’ are not included within the tax treaty definition of a resident of a contracting state (being France).

Tax authorities confirm treatment of foreign reimbursements related to partner-administrators or expatriate costs

The RFB, on 25 August 2020, published Solução de Consulta DISIT/SRRF02 2006 (dated July 20 2020) (SC 2006/2020), which confirms that the reimbursement by a Brazilian entity of certain costs originally supported by an entity in the same group located abroad should not be subject to withholding tax (WHT) or other contributions that are applicable on cross-border payments. Furthermore, it confirms that such amounts should be treated as deductible for corporate income tax (CIT) purposes where such expenses are necessary to the business activities of the Brazilian entity.

By way of background, the reimbursement of costs to foreign related parties has been a controversial issue over the years. In addition to common cost-sharing issues faced by taxpayers in foreign jurisdictions relating to adequate allocation and documentation criteria, the RFB has recently released decisions providing that international cost-sharing arrangements should generally be treated similarly to the importation of technical services. While a Solução de Consulta does not represent law or legal precedent, it does provide further support and guidance for Brazilian entities in relation to how the RFB is treating arrangements under consideration.

It is important to highlight that the decisions referred to above contemplate costs passed to the Brazilian entity relating to partner-administrators or expatriates. However, the rationale adopted by the tax authority in coming to its decision appears aligned with previous guidance issued by the RFB supporting the non-application of transaction taxes in the context of international cost-sharing agreements (i.e. that the reimbursement does not constitute income in the hands of the foreign entity).

In the context of international cost-sharing arrangements, the recent trend of decisions by the RFB has been to characterise such remittances as income, consideration, or remuneration for technical services (depending on the particular tax or contribution). As such, while the decision is favourable for certain operations, the treatment of broader international cost-sharing arrangements remains controversial.

Brazilian Superior Tribunal of Justice (STJ) confirms the triggering event for WHT

The STJ unanimously confirmed that the mere accounting recognition of a debt (as an ‘accounts payable’) was not sufficient to constitute the triggering event for income WHT. Rather, it is necessary that the debt is enforceable by the foreign creditor so that WHT should only be triggered when the debt matures or at the moment of payment, whichever comes first.

By way of background, over the years, there has been substantial debate in relation to the timing of the triggering event for WHT purposes. More specifically, whether the reference to ‘credit’ within the contemplated potential triggering events could be taken to mean the mere accounting ‘credit’ in the Brazilian entity's accounting books. At the other end of the spectrum, there exists the view that WHT should only be due upon actual payment/remittance. Finally, there exists a ‘middle ground’, being the view that the triggering event should be the earlier of the payment being made or the obligation to make payment arising, whichever comes first. It is this latter view that was adopted by the STJ.

The Brazilian Supreme Federal Court (STF) resumes discussion on taxation of software transactions

Software transactions have been under increasing scrutiny and interest of the RFB over the last few years. Historically, transactions with ready-to-use software (i.e. off-the-shelf software) were deemed to be akin to sales with goods and subject to the same tax implications of a buy/sell transaction with a regular, tangible good. However, the STF is now debating whether such understanding still prevails.

One of the new lines of argumentation is that the software is now currently updated, including maintenance services and user assistance, which can no longer be considered as a 'good', but rather a service, regardless of whether such software is customisable or an off-the-shelf one.

This distinction is relevant for the Brazilian entities that need to engage in such transactions because the taxation applied to goods and services in Brazil (in terms of indirect taxes) should not overlap. Therefore, to the extent that this STF understanding prevails, then the application of a local state VAT tax (known as ICMS) would no longer be possible, and a municipal service tax (ISS) would be due instead. However, given the lack of certainty at this point, certain companies were conservatively collecting both taxes, and the ICMS burden can be quite high (traditionally 18%), whereas ISS cannot go above 5%. While not final, Brazilian entities dealing with software were optimistic about the STF decision thus far.