• Brazilian Revenue Office Issues New List of Tax Havens and Tax Privileged Regimes
  • June 22, 2010 | Authors: Roberta P. Caneca; Christiano Chagas Monteiro De Melo; Ivan Tauil
  • Law Firms: Mayer Brown LLP - São Paulo Office ; Mayer Brown LLP - Rio de Janeiro Office
  • On June 7, 2010, the Brazilian Federal Revenue Office issued the Normative Ruling No.  1,037 (NR 1,037/10), which sets forth which countries and which types of entities must be treated as tax haven jurisdictions or privileged tax regime entities.

    The list of tax haven jurisdictions was formerly contained in the Normative Ruling No. 188, of 2002 (NR 188/02). However, since the enactment of Law 11,727 on June 23, 2008 (Law 11,727/08), which broadened the concept of tax haven jurisdictions and introduced the new concept of “tax privileged regime”,  the list of NR 188/2002 needed to be updated to reflect the new regulations of Law 11,727/08.

    Taking this into consideration, the issuance of this Normative Ruling was highly anticipated  by both Brazilian taxpayers that carry out transactions with companies domiciled abroad and foreign investors that carry out transactions in Brazil.

    Tax Haven Jurisdictions

    As mentioned above, Law 11,727/08 broadened the concept of tax haven jurisdictions, adding as tax havens the jurisdictions where the local legislation imposes restrictions on disclosing the composition of the shareholders or the ownership of the investment or the ultimate beneficiary of the income derived from transactions carried out and attributable to a non-resident.

    Based on this new concept, NR 1,037 brought a new list of tax haven jurisdictions.¹ Notably, Switzerland, which was not in the List of NR 188/02, is now considered a tax haven jurisdiction.

    Being treated as tax haven jurisdiction means that: (i) remittances of interest from Brazil should be subject to Withholding Income Tax(WHT) at a 25 percent rate, instead of 15 percent due on remittances made to residents and entities domiciled in non tax haven jurisdictions; (ii) payment of interest on net equity (JCP) would be subject to a 25 percent rate, instead of 15 percent due on remittances to residents and entities domiciled in non tax haven jurisdictions; (iii) capital gains earned outside stock exchanges are subject to a 25 percent rate, instead of 15 percent due on remittances to residents and entities domiciled in non tax haven jurisdictions; (iv) the exemption applicable to income earned in Private Equity Funds is not applicable; (v) Brazilian transfer pricing rules apply, regardless of whether the Brazilian and the foreign entity are related companies; (vi) Brazilian thin capitalization rules² must be observed, which means that interests paid to the foreign entities resident in tax haven jurisdictions will only be deductible if the debt: equity ratio of the Brazilian borrower does not exceed 0.3:1; and (vii) the special tax regime for investment in Brazilian financial and capital markets (2,689 Investment) does not apply to these entities.

    Tax Privileged Regimes

    Law No. 11,727/08 introduced the concept of privileged tax regime, which is considered to be a regime that (i) either does not tax income or taxes income at a maximum rate lower than 20 percent; (ii) grants tax advantages to a nonresident entity or individual without the need to carry out a substantial economic activity in the country or dependency or conditioned on the non-exercise of a substantial economic activity in the country or dependency; (iii) does not tax  income generated outside the jurisdiction, or that taxes such income at a maximum rate lower than 20 percent; or (iv) does not provide access to information related to shareholding composition, ownership of goods and rights or the economic transactions carried out.

    NR 1,037 sets forth that, among others, the United States LLCs, held by non-residents and not subject to federal income tax in the US, as well as Holding Companies domiciled in Luxemburg, Denmark and Netherlands shall be treated as tax privileged domiciled entities.

    According to NR 1,037, the other tax privileged regimes are: (i) Financial Investment Companies of Uruguay (Sociedades Financeiras de Inversão), (ii) International Trading Company (ITC) domiciled in Iceland, (iii) the offshore KFT companies domiciled in Hungary, (iv)  Entidad de Tenencia de Valores Extranjeros (ETVEs) of Spain and (v) the International Trading Companies (ITC) and International Holding Companies (IHC) domiciled in Malta.

    This means that transactions involving the sale of goods or rights between Brazilian residents and these entities should be subject to Brazilian Transfer Pricing Rules, and that interest paid by Brazilian companies to these entities will only be deductible if the debt: equity ratio of the Brazilian borrower does not exceed 0.3:1, according to Brazilian thin capitalization rules.

    Under the current legislation, only the transactions mentioned in the paragraph above are affected by the characterization of a given company as a tax privileged regime domiciled company. Thus, other transactions, such as payment of JCP or earning of capital gains, are still subject to the same rules. Moreover, the special tax regime for investment in Brazilian financial and capital markets (2,689 Investment) is still available for “Tax Privileged Regimes” companies above mentioned.

    1 According to NR 1,037/10, the new tax haven list is the following: American Virgin Islands; American Samoa; Andorra; Anguilla; Antigua & Barbuda; Arab Emirates; Aruba; Ascension Island, Bahamas; Bahrain; Barbados; Belize; Bermudas; British Virgin Islands; Brunei, Campione D’Italia; Cayman; Channel  Islands (Alderney, Guernsey, Jersey e Sark); Cook Islands; Costa Rica; Cyprus; Djibouti; Dominica; French Polinesia; Gibraltar; Granada; Hong Kong; Kiribati; Lebanon; Lebuan; Liberia; Liechtenstein; Macau; Madeira Islands; Maldives Islands; Man Islands; Marshall Islands; Mauritius; Monaco; Montserrat; Nauru; Niue Islands; Netherlands Antilles; Norfolk Islands; Occidental Samoa; Oman; Panama; Pitcairn Islands; Queshm Islands; San Cristoban & Nevis; San Marino; San Vicente & Granadinas; Saint Helena Islands; Santa Lucia; São Pedro e Miguelão Islands Suaziland; Seychelles; Singapore; Solomon Islands; St. Kitts e Nevis; Switzerland; Tonga; Turks & Caicos; Tristão da Cunha; Vanuatu.

    2 Brazilian thin capitalization rules were introduced in Brazil by means of Provisional Measure No. 472, of December 15th, 2009 (“MP 472/09”). Until the present moment, MP 472/09 was not converted into Law.