TAX NEWS - 2010

Brazil Tax: Tax havens list expanded, list of privileged tax regimes added

The Brazilian government published guidance in the Official Gazette on 7 June 2010 (Normative Instruction No. 1,037/2010) that expands the 2002 list of jurisdictions considered tax havens and introduces a new list of regimes designated as privileged tax regimes. The latter list includes entities such as Luxembourg, Malta and Netherlands holding companies, as well as U.S. limited liability companies (LLCs). The instruction is effective as from the date of publication.


Background

Law 11,727/2008 that became effective on 1 January 2009 introduced the concept of a privileged tax regime for transfer pricing purposes. A jurisdiction will be deemed to have a privileged tax regime if it:

- Does not tax income (domestic or foreign source) or earnings or imposes tax at a rate lower than 20%;

- Grants tax benefits to nonresident legal entities or individuals without requiring that substantial economic activities be carried out in the country (territory) or are conditioned on no economic activities in the country (territory); or

- Does not permit access to information regarding the corporate structure, ownership of assets or rights or economic transactions.

Law 11,727/2008 also broadened the concept of a tax haven for tax purposes to include jurisdictions whose domestic legislation does not permit access to information regarding the identification of the actual beneficial owner of the income.


Two black lists

Normative Instruction No. 1,037/2010 contains two separate black lists based on geography and the type of tax regime. The original tax haven black list dating from 2002 (Normative Instruction 188/2002) included 53 jurisdictions; by contrast, the new list designates 65 jurisdictions as tax havens for Brazilian tax purposes. In total, 14 new jurisdictions have been included: Ascension Islands, Brunei, French Polynesia, Kiribati, Norfolk, Pitcairn Islands, Qeshm Island, Saint Pierre and Miquelon, St. Kitts, Solomon Islands, St. Helena Island, Swaziland, Switzerland and Tristan da Cunha. Luxembourg 1929 holding companies and Malta have been removed from the tax haven list, but now appear on the new privileged tax regime list.

The second list classifies nine regimes as privileged tax regimes:

1. Holding companies incorporated under Luxembourg law;
2. Holding companies incorporated under Danish law;
3. Holding companies incorporated under Dutch law;
4. International trading companies incorporated under Icelandic law;
5. Offshore companies incorporated under Hungarian law;
6. LLCs incorporated under U.S. state law, in which the equity interest is held by nonresidents not subject to U.S. federal income tax;
7. Entidad de Tenencia de Valores Extranjeros incorporated under Spanish law;
8. International trading companies and international holding companies incorporated under Maltese law; and
9. Sociedad Anonima Financiera de Inversion (Safis) incorporated under Uruguayan law until December 2010.

It should be noted that the language relating to U.S. LLCs is somewhat ambiguous because it is unclear whether nonresidence and nontaxation (e.g. under the check-the-box regime) are cumulative criteria to bring the LLC within the scope of a privileged tax regime.


Tax consequences

The tax consequences of inclusion on the expanded tax haven black list or the privileged tax regime's new "gray list" differ as follows:


Description                           Unrelated party         Related party                           Black list                                       Gray list
 
Transfer pricing rules                    No                        Yes                     Yes, even with unrelated parties      Yes, even with unrelated parties
Thin capitalization rules                 No             2:1 debt-to-net equity ratio     0.3 debt-to-net equity ratio          0.3 debt-to-net equity ratio
Withholding tax on outbound         15%                      15%                                       25%                                            15%
payments
Nonresident capital gains              15%                      15%                                       25%                                            15%
 
 

Comments

Before the introduction of Normative Instruction 1,037/2010, Brazilian taxpayers typically relied on the black list in Normative Instruction 188 for purposes of determining the withholding tax on the remittance of proceeds abroad and the application of the transfer pricing tests. The main consequence of having a remittance or transaction with a black list country was that the withholding tax rate was 25% rather than the standard rate of 15% and the transfer pricing tests applied regardless of whether the parties were related. From a practical perspective, the new black list expands the jurisdictions that will be subject to the increased 25% rate and brings countries on the expanded tax haven list within the scope of the transfer pricing rules.

The gray list represents the enforcement of new concepts and only should have an effect for transfer pricing (not withholding tax) purposes. Note that lower thin capitalization ratios should apply as a result of new provisions introduced by Provisional Measure 472/09, which is expected to be converted into law within the next few days.