Brazil

Brazilian taxpayers are subject to IRPJ and CSLL using an ‘actual profits’ method (i.e. APM - Lucro Real), which is based on taxable income (i.e. earnings before taxes or EBT), adjusted by certain additions and exclusions as determined by the legislation. The actual profit can be calculated annually or quarterly. For the annual calculation, the tax authorities collect anticipations during the year, as the taxpayer is required to calculate the income tax monthly.

Subject to certain restrictions (i.e. where gross income does not exceed BRL 78 million and depending on the activity), Brazilian taxpayers have the option to calculate IRPJ and CSLL using a ‘presumed profits’ method (i.e. PPM - Lucro Presumido). Under the PPM, the income is calculated on a quarterly basis on an amount equal to different percentages of gross revenue (i.e. based on the entity’s activities) and adjusted as determined by the prevailing legislation. Below we exemplify the main presumed profit rates that must be applied to determine the calculation basis:

* Not applied to legal entities engaged in the performance of hospital activities or transportation services, as well as the professional services societies.

Inventory valuation

Brazilian income tax regulations require that inventory may be valued at the actual average cost or by the cost of the most recently acquired or produced goods. Rulings to the effect that last in first out (LIFO) is not acceptable have been given. With the introduction of the public digital bookkeeping system (i.e. SPED), the Brazilian tax authorities (i.e. RFB) should have access to the productive process and inventory movement of companies (see the Tax administration section for more information).

Capital gains

Capital gains derived from the sale of assets and rights, including shares/quotas, are generally taxed as ordinary income.

Carried forward capital losses may be offset only against capital gains. Unused capital losses are treated similarly to income tax losses with regard to limits on use and carryforward period. Capital losses may be used to offset other operating income in the year that they are incurred.

Capital gains derived by non-residents (including transactions carried out abroad between two non-resident investors, involving assets or rights located in Brazil) may be taxed in Brazil.

Such gains should be subject to progressive income tax rates, which range from 15% (for capital gain that does not exceed BRL 5 million) to 22.5% (for the portion of the gain that exceeds BRL 30 million), as per the table below:

For beneficiaries residing in tax haven jurisdictions, the rate applicable remains at 25%, irrespective of the amount of the gain, due to an explicit provision in the law for these situations.

Exemptions from capital gains taxation may be available for specific transactions (e.g. certain regulated investments on the Brazilian stock market).

Dividend income

In general terms, no IRRF is due on cash dividends or profits paid or credited to either corporate or individual shareholders. Brazilian resident beneficiaries are not subject to further income tax on receipt of dividends.

Financial income

Fixed-rate interest income from short, medium, or long-term financial market transactions, including swap transactions, is subject to IRRF at rates ranging from 15% to 22.5%. Non-fixed financial gains related to stock/commodities exchange and/or futures market transactions are taxed at rates of 20% (day-trade) and 15% (all other cases). For legal entities, the total income or gain is considered taxable income, and the tax withheld may be offset against the total tax due by the corporate taxpayer.

Additionally, PIS/COFINS may be levied at a rate of up to 4.65%, depending on the type of transactions and taxation regime (i.e. non-cumulative method).

Royalty income

Under Brazilian tax legislation, royalties are defined as the remuneration agreed between contracting parties for the use or exploration of:

• industrial property rights (i.e. patents, trademarks, brand names, and other rights of the same nature)
• know-how (sharing of technical information, necessary for the industrial manufacturing of a product or process, deriving from experience previously acquired), and
• copyrights.

Royalty income should be subject to regular corporate income taxation in Brazil.

Foreign currency exchange gain/loss

With respect to foreign currency exchange gain/loss, which may arise from receivables or liabilities denominated in foreign currency, Brazilian tax legislation allows the local company to elect to consider the related effect, for tax computation purposes, either upon an accrual or cash basis (i.e. actual receipt/payment of funds).

Foreign income

Brazilian resident companies are taxed on worldwide income. See Controlled foreign companies (CFCs) in the Group taxation section for more information.