Tax on corporate transactions in Brazil: overview

A Q&A guide to tax on corporate transactions in Brazil.

The Q&A gives a high level overview of tax in Brazil and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on Corporate Transactions: Country Q&A tool.

The Q&A is part of the global guide to tax on transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-guide.

Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

Brazil is a federal republic, divided into states and municipalities. The competence to impose taxes is defined in the Federal Constitution (Constitution) and attributed to the federal government, states and municipalities, and each has the following responsibilities for collecting taxes:

  • The Brazilian Federal Revenue Authority is responsible for levying and collecting taxes at federal level (for example, corporate income tax (Imposto de Renda da Pessoa Jurídica) (IRPJ), withholding income tax (Imposto de Renda Retido na Fonte)(IRRF), social contribution on net profits (Contribuição Social sobre o Lucro Líquido) (CSLL), contribution of intervention on economic domain (Contribuição ao Programa de Integração Social) (PIS), contribution for the financing of social security (Contribuição para o Financiamento da Seguridade Social) (COFINS), excise tax (Imposto sobre Produtos Industrializados) (IPI), tax on financial transactions (Imposto sobre Operações Financeiras) (IOF), import duty (Imposto de Importação), export duty (Imposto de Exportação) and contributions for the purpose of achieving economic stability (Contribuição de Intervenção no Domínio Econômico) (CIDE)).

  • The State Treasury is responsible for levying and collecting state taxes (for example, state value added tax (Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de Transporte Interestadual e Intermunicipal e de Comunicação) (ICMS) and estate and gift tax (Imposto sobre Transmissão Causa Mortis e Doação de quaisquer Bens ou Direitos) (ITCMD)).

  • Municipalities are responsible for levying and collecting taxes at local level (for example, municipal tax on services (Imposto sobre Serviços de Qualquer Natureza) (ISS) and real estate tax (Imposto sobre Transmissão de Bens Imoveis) (ITBI)).

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

For all three competent authorities (federal, state and municipal), taxpayers can submit a formal enquiry before completing a corporate transaction for an interpretation of the tax laws applicable to that specific transaction.

Each tax authority establishes, by law, its own procedure, but in most cases will only accept a query that relates to a genuine transaction (that is, it will not accept queries relating to theoretical transactions).

In addition to queries relating to the tax laws, at the federal level it is also possible to submit formal enquiries concerning:

  • The tax classification of products.

  • Customs legislation.

  • Transfer pricing legislation (the procedure is established by Law No. 9.430/96).

However, it is not common to apply for guidance from the tax authorities in Brazil, principally because a taxpayer is bound by the tax authority's decision.

 

Disclosure of corporate transactions

3. Is it necessary to disclose the existence of any corporate transactions to the tax authorities?

Circumstances where disclosure is required

In July 2015, the President of Brazil enacted Provisional Executive Act No 685 which states that all transactions that may result in a discontinuation or reduction of tax, or a tax deferral, must be disclosed by taxpayers to the Brazilian Federal Revenue Authority, when:

  • The transaction does not involve any business purpose.

  • The transaction involves the use of indirect legal business or contains a clause that denatures, even partially, the effects of a typical contract.

  • The specific transaction is expressly provided for in an act of the Brazilian Federal Revenue Authority.

Note that the Provisional Executive Act is still pending approval by the Federal Congress, after which it will be transposed into law. At the present date, the form to be filed within the Brazilian Federal Revenue Authority is still not regulated and the list of transactions to be disclosed has not been published.

Manner and timing of disclosure

Taxpayers must disclose their corporate transactions by 30 September each year to the Brazilian Federal Revenue Authority. The Brazilian Federal Revenue Authority will enact the procedures necessary to disclose corporate transactions.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

4. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

ITCMD

Key characteristics. ITCMD is a state tax imposed by the tax authority on the transfer of ownership of goods and rights upon gift or inheritance. The tax is levied on the value of the goods or rights. In some states, ITCMD can be partially deferred in a usufructuary agreement in which the donator retains either the bare property or enjoyment rights in the real estate. If the donator retains the bare property, ITCMD will be levied on the usufruct (enjoyment right), calculated on 1/3 of the real estate value. If the donator retains an enjoyment right in the property, ITCMD will be levied on the bare property, calculated at 2/3 of the real estate value. In these situations the tax basis is reduced even though the applicable tax rate remains at 4%.

Triggering event. ITCMD is charged on the transfer of an asset or amount of money either by gift or under inheritance (for example, shares, money and real estate).

Liable party/parties. ITCMD is usually paid by the recipient of the gift or inheritance.

Applicable rate(s). Tax rates vary according to the state legislation where the taxable event takes place, up to a maximum of 8% (for example, a 4% rate applies in the state of São Paulo). There are considerable rumours that the State of São Paulo will raise the ITCMD tax rate up to 8%.

ITBI

Key characteristics. ITBI is a municipal tax charged on transfers of real estate and real estate rights. ITBI is not levied if both:

  • The real estate is transferred to a company as a capital subscription/spin-off transaction.

  • The main activity of the acquiring company does not involve real estate transactions.

If the real estate property is transferred back to the previous owner (before the capital increase) ITBI will also not be levied.

Triggering event. ITBI is charged when the transfer of real estate or real estate rights is registered by the notary office.

Liable party/parties. ITBI is generally paid by the buyer of the real estate or real estate right.

Applicable rate(s). The amount of the tax varies from city to city and is calculated based on the reference value of the goods in question, which is determined by the municipality. The applicable rate can vary from 2% to 6%. In São Paulo the tax rate has been increased from 2% to 3%.

 

Corporate and capital gains taxes

5. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

IRPJ and CSLL

Since these taxes have similar tax basis, they will be analysed together.

Key characteristics. IRPJ and CSLL are levied whenever a taxpayer makes a profit, calculated through an "actual basis regime" or a "presumed basis regime".

Triggering event. In the actual basis regime, IRPJ and CSLL are paid only when the taxpayer has profits (earnings less expenses in fact incurred). In the presumed basis regime, IRPJ and CSLL are assessed quarterly over a presumed profit margin basis, which varies according to the specific sort of business, upon gross revenue.

Payments must be made through a document called DARF (Federal Revenues Collective Document).

Liable party/parties. The taxpayer making the profit pays the tax.

Applicable rate(s). The rate for IRPJ is 15% for profits up to BRL60,000 per quarter, plus an additional 10% (a total of 25%) for profits above this threshold. The rate for CSLL is 9% (except for financial and insurance companies, which are subject to CSLL at a rate of 20%).

In the actual basis regime, the taxpayer must account for all revenues and expenses that meet the deductibility requirements of the law, regardless of whether they are operational or financial, and assess the "actual profit". The "actual profit" is the tax basis that IRPJ and CSLL rates are applied to.

In the presumed basis regime, there is a presumption that the profit is equivalent to a portion of the total operating revenues. In the case of services, the presumed margin is 32% for IRPJ and CSLL purposes. Dealers and manufacturers are subject to the presumption of 8% for IRPJ and 12% for CSLL. Non-operating and financial revenues (including capital gains) are added to the "presumed profit", which provides the tax basis for IRPJ and CSLL. The IRPJ and CSLL rates indicated above are applied to this tax basis.

Under this tax regime, the law determines the company's taxable profit margin based on its revenues.

Some companies cannot opt for the presumed basis regime, for example:

  • Those companies earning more than BRL78 million per year in revenues (including gross sales, capital gains, financial revenues and dividends received). If a taxpayer reaches this amount of revenue in Brazil, it will be subject to the actual basis regime.

  • Financial institutions.

  • Those who earn any indirect income abroad (that is, through an investment vehicle including foreign direct investment (FDI) or portfolio investment). Those who earn direct income abroad are not prohibited from opting for the presumed basis regime (that is, those companies that export services or products directly).

IRRF

Key characteristics. Generally, any income paid, credited, delivered or remitted by a Brazilian source to an individual or legal entity residing abroad is subject to IRRF.

Triggering event. IRRF is due at the moment of payment, credit, delivery or remittance of the funds.

Liable party/parties. The foreign beneficiary of the remuneration pays the tax, although the Brazilian source of payment is responsible for withholding and collecting the tax.

Applicable rate(s). The rates vary from 15% to 25% depending on the:

  • Nature of the paid remuneration.

  • Location of the beneficiary (a higher rate is imposed where the beneficiary is a resident of a country that is deemed to be a favourable tax jurisdiction, for example, the Cayman Islands or the British Virgin Islands).

The Brazilian tax authorities recently underscored that IRRF shall not be withheld by the Brazilian source of payment when services are provided by a foreign company resident in a country with which Brazil has signed a double tax treaty.

PIS and COFINS

Since these contributions have similar tax basis, they will be analysed together.

Key characteristics. PIS and COFINS are social contributions charged on the monthly gross and financial revenues of Brazilian legal entities, calculated through a "cumulative regime" or a "non-cumulative regime".

Triggering event. The social contributions are payable on a monthly basis on gross and financial monthly revenues.

Liable party/parties. The legal entity receiving the monthly revenues is liable to pay the social contributions.

Applicable rate(s). The social contributions are taxed under either of the following regimes:

  • Non-cumulative regime: COFINS is charged at 7.6% and PIS is charged at 1.65%. It is possible to appropriate credits from the company's determined expenses, such as inputs and raw materials of goods and services.

  • Cumulative regime: COFINS is charged at 3% and PIS is charged at 0.65%. Credits are not permitted, which makes the taxes cumulative throughout the supply chain (financial entities are subject to a different cumulative system).

The amount due must be paid through DARF within the first 15 days of the subsequent month.

ISS and ICMS

See Questions 6 and 7.

 

Value added and sales taxes

6. What are the main value added and/or sales taxes potentially payable on corporate transactions?

IPI

Key characteristics. IPI is a federal tax levied on manufactured goods.

Triggering event. There are two triggering events related to IPI:

  • Domestically, when manufactured products leave the industrial establishment.

  • An import of manufactured products.

The IPI taxpayer is entitled to book a tax credit for the tax levied on the previous operation. The credit is normally indicated in the invoice of the goods acquired.

Liable party/parties. Manufacturers and importers are IPI taxpayers. IPI legislation attributes to some non-manufacturing agents the obligation to pay the IPI on its own transactions. Due to the extensive list of "establishments considered as manufacturers", further details are not provided in this answer.

Applicable rate(s). The tax rates vary depending on the type of product manufactured or imported. For example, the IPI rate levied on cigarettes is 300%, while the rate levied on soap is zero. Also, the IPI rate can be modified any time by an Act of the Chief of the Brazilian Executive Government (Presidency of the Republic) and comes into force immediately upon its publication.

ICMS

Key characteristics. ICMS is a value added tax levied on the sale of goods by the states of the Brazilian Federation. The ICMS taxpayer can book a tax credit for the tax levied on the previous operation. The credit is normally indicated in the invoice of the goods acquired, although there are several restrictions to the use of such credits prescribed by law. ICMS is also levied on the provision of communication and transport services.

Triggering event. The triggering events for ICMS are:

  • The sale and importation of goods.

  • The supply of electricity.

  • The provision of certain services such as interstate and intermunicipal transportation and communication.

Even though there is federal law that regulates ICMS, the Brazilian states are authorised to enact specific rules.

Liable party/parties. Retailers, wholesalers, industries and importers are subject to the tax. For some products, state legislation can determine that ICMS is levied as a withholding tax, where the manufacturer or importer pay ICMS for the entire commercial chain of the product.

Applicable rate(s). States are entitled to establish their own intrastate rates. In most cases, the rate applied is 17% or 18%. The interstate rates vary from 7% to 12% for national goods. For imported goods, the interstate rate is 4%.

ISS

Key characteristics. ISS is a municipal tax levied on the provision of services. The tax applies on the taxpayer's service gross income. An ISS taxpayer is not entitled to book a tax credit for the tax paid. ISS is not levied on the export of services.

Triggering event. The provision of services listed on the federal legislation (Supplementary Law No. 116/2003) triggers the tax. Those services include, among others:

  • Publicity.

  • Tourism.

  • Information technology.

  • Accounting.

  • Entertainment.

  • Storage.

  • Engineering and architecture.

  • Franchising.

  • Factoring.

  • Cleaning.

  • Insurance.

  • Outsourcing.

  • Leasing.

  • Medical and health care.

ISS is also charged on the importation of services.

Liable party/parties. The service provider is liable to pay the tax. For some services, the local legislation can establish a withholding tax mechanism, determining that the client must collect the tax.

Applicable rate(s). The ISS rates vary from 2% to 5% according to the service provided and the local legislation in force.

 

Other taxes on corporate transactions

7. Are any other taxes potentially payable on corporate transactions?

IOF

Key characteristics. IOF is a federal tax levied on transactions related to financial operations.

Triggering event. The tax is applied to the following transactions:

  • Loans.

  • Exchange of foreign currency.

  • Insurance.

  • Transactions involving securities.

The tax basis is the amount, in local currency, received, delivered or made available.

Liable party/parties. The IOF taxpayer is the lender (for loan transactions), the purchaser (for exchange of foreign currency and securities) and the insured (for insurance transactions). The legislation determines that the financial institutions, where applicable, are jointly responsible for the tax due.

Applicable rate(s). The rate depends on the transaction and it can vary from 0% to 25%. The IOF rate can also be modified anytime by an Act of the Chief of the Brazilian Executive Government (President of the Republic), and comes into force with immediate effect.

Import PIS and import COFINS

Key characteristics. These social contributions are due on the import of goods and services. Import PIS and import COFINS are levied on all import transactions carried out by Brazilian companies.

Triggering event. Liability to pay these social contributions arises on the entry of foreign goods into the Brazilian territory. On the import of services the social contributions are due at the time of payment, credit, delivery, use or remittance of service payments to non-resident service providers.

Liable party/parties. Importers and legal entities who hire services from abroad are liable to pay the social contributions.

Applicable rate(s). The tax basis is the gross income price of the transaction, and the general rates are applied as follows:

  • Import PIS: 2.1%.

  • Import COFINS: 10.65%.

For specific products, the law may apply specific tax rates.

Import duty

Key characteristics. Import duty is a federal tax levied on the importation of goods. This tax is calculated on the price of the goods placed on the Declaration of Importation registered by the importer at customs clearance. The tax aims to protect Brazilian producers from foreign competition.

Triggering event. The importation of goods triggers the tax.

Liable party/parties. Importers are liable to pay the tax.

Applicable rate(s). The tax rates vary according to each imported product type. The rate can be modified anytime by an Act of the Chief of the Brazilian Executive Government (President of the Republic), which comes into force with immediate effect.

Export duty

Key characteristics. Export tax is a federal tax levied on the export of goods. It is calculated based on the price of goods placed on the Declaration of Exportation registered by the exporter at customs clearance. This tax is charged on a very limited number of products (established by the federal government).

Triggering event. The export of goods from the Brazilian territory triggers the tax.

Liable party/parties. Exporters are liable to pay the tax.

Applicable rate(s). The tax rate varies according to each exported product type. The rate can be modified anytime by an Act of the Chief of the Brazilian Executive Government (President of the Republic), which comes into force with immediate effect.

CIDE-fuel

Key characteristics. CIDE-fuel (CIDE- combustível) is a federal tax levied on fuel.

Triggering event. The tax is triggered by the importation and domestic sales of fuel (oil, natural gas and ethanol).

Liable party/parties. Producers, formulators and importers of fuel are liable to pay the tax.

Applicable rate(s). The rates vary according to each kind of fuel.

CIDE-royalties

Key characteristics. CIDE-royalties is a federal tax levied on payments of royalties and fees associated with technology transfers, patents and trade marks made to non-resident beneficiaries.

Triggering event. CIDE-royalties is due on amounts paid, credited, delivered, used or remitted in relation to the following transactions:

  • Transfer of technology.

  • Provision of technical assistance.

  • Transfer and licensing of trade marks.

  • Transfer and licensing of patents.

  • Provision of technical services.

Liable party/parties. Brazilian companies that pay royalties to non-residents are liable to pay the tax.

Applicable rate(s). 10% of the total gross amount paid under the above-mentioned triggering events.

 

Taxes applicable to foreign companies

8. In what circumstances will the taxes identified in Questions 4 to 7 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

There is no clear definition of a permanent establishment in the Brazilian tax legislation. There are only fragmented rules in the Income Revenue Code (RIR-99) establishing that a foreign company will be taxed in Brazil if:

  • It establishes branches, agencies or representatives in the country.

  • It signs a consignment arrangement with a Brazilian consignee.

  • It performs direct sales in Brazil through an agent or representative in the country, who has the power to bind the foreign party.

Where the situations described above occur, the foreign company will be taxed as a Brazilian legal entity and must pay federal taxes (IRPJ, CSLL, PIS and COFINS), state taxes (ICMS, ITCMD) and municipal taxes (ISS and ITBI).

However, even if none of the situations described above apply, Article 126 of the National Tax Code establishes that a person can still be taxed in Brazil where that foreign party sets up an economic unit in the Brazilian territory. Based on this general rule, the tax authorities can argue that a de facto branch exists.

In addition, even where there is no presence in the Brazilian territory, any services provided by a foreign company are taxed in Brazil (they are subject to ISS and IRRF). However, there are exceptions for specific transactions involving double tax treaties (see Question 5).

 

Dividends

9. Is there a requirement to withhold tax on dividends or other distributions?

Dividends

Dividends paid by Brazilian companies to residents (individuals or companies) and non-residents (including those residing in tax havens) are exempt from tax under Article 10 of Law No 9.249/1995. In addition, if the company is a limited liability company (sociedade limitada), the stockholder may distribute profits disregarding the fraction of their stock holdings, which allows for the structuring of compensation through dividends with little downside on the corporate governance aspect.

Interest on shareholder's equity

Brazilian companies are allowed to pay interest to shareholders and treat those payments as a deductible expense for the purposes of calculating IRPJ and CSLL. This deductible expense is limited to the greater of either:

  • 50% of the company's net income (before payment of interest, IRPJ and CSLL) for the applicable period.

  • 50% of the company's accumulated profit for the applicable period.

The rate applied in calculating interest on shareholders' equity cannot exceed the long-term interest rate (Taxa de Juros de Longo Prazo) (TJLP), which is an official index established by the Brazilian Monetary Committee (CMN) for the applicable period.

Any payment of interest on shareholders' equity to shareholders, whether or not they are residents in Brazil, is subject to IRRF of 15% (this rate increases to 25% when payments are made to a tax haven jurisdiction). For companies, IRRF represents only an advance taxation of the total tax burden due when the interest received is computed with other incomes in the IRPJ and CSLL tax basis, whereas for individuals the withholding tax represents the final tax due on this type of income.

 

Share acquisitions and disposals

Taxes potentially payable

10. What taxes are potentially payable on a share acquisition/share disposal?

The taxes potentially payable on a share acquisition or share disposal are IRPJ and CSLL, which are levied at an aggregate rate of 34% (see Question 5) over the difference between the selling price and the purchase price of the shares (capital gain). Share disposals (current assets) are subject to PIS or COFINS at an aggregate rate of 4.65%. Share disposals (permanent and fixed assets) are not subject to PIS or COFINS.

IOF is also levied if shares are sold by non-residents (see Question 7).

 

Exemptions and reliefs

11. Are any exemptions or reliefs available to the liable party?

IRPF (residents in Brazil)

Net gains are exempt from income tax provided they are both:

  • Earned by individuals in transactions with shares traded on stock exchange market.

  • Do not exceed BRL20,000 each month.

In addition, there is a full exemption from tax on capital gains arising from the sale of shares acquired and maintained by an individual taxpayers for a period of at least five years (Article 4, Decree-Law No 1.510/76). However, this exemption only applies to shares acquired between 1976 and 1983, as this provision was subsequently repealed by Article 58 of Law No 7.713/88.

Full exemption is also applicable on capital gains arising from the sale of specific shares on the Brazilian stock exchange market (under rules established by Provisional Measure No 651/14). The exemption from taxation applies only for sales related to small and medium companies (market value under BRL700 million before the IPO).

If the transfer of shares is structured as a gift for the beneficiary, ITCMD will also be levied. The ITCMD tax basis will be the equity value of the shares being transferred. The ITCMD rate varies (up to 8%) depending on the donor's residence. For example, São Paulo provides an exemption of up to BRL48,000 donations for each consecutive 12-month period.

IRRF

Non-resident investors (individual or collective) who are not resident in a tax haven jurisdiction listed on the Brazilian Black List (Normative Instruction RFB No 1.037/10) who carry on investments in Brazil are exempt from taxation on the capital gains earned on transactions on the Brazilian stock exchange market (under rules established by the Brazilian Monetary Committee (CMN) (Resolution CMN No 2.689/00)).

IOF

IOF is charged at a 0% rate for currency exchange transactions related to both the inflow and outflow of funds for investments performed under Resolution CMN No 2.689/00 and for equities that are publicly held (including public offers).

 

Tax advantages/disadvantages for the buyer

12. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

The advantages/disadvantages of a share acquisition for the buyer depend on the specific characteristics of the transaction. Even an exchange of shares is treated as sell/buy transaction and taxation cannot be deferred in this situation. Advantages/disadvantages might be derived from reorganisations implemented after the shares are acquired by the buyer, since in Brazil there is no group taxation. Each company is considered an independent taxpayer.

Advantages

If the buyer (assuming it is a company) incorporates to the acquired company:

  • The goodwill potentially paid might be subject to amortisation and deducted as an expense.

  • Tax losses and credits registered by the acquired company might be used if it is the surviving entity.

Disadvantages

The buyer can only gain tax benefits where there is a reorganisation (incorporation or merger).

There is also additional risk since the buyer becomes responsible for the tax liabilities of the acquired company.

 

Tax advantages/disadvantages for the seller

13. Please set out the tax advantages and disadvantages of a share disposal for the seller.

The advantages/disadvantages of a share acquisition for the seller also rely on the specific characteristics of the transaction. Even an exchange of shares is treated as a sell/buy transaction; therefore taxation cannot be deferred. Advantages/disadvantages might be derived from any restructuring implemented before the shares are sold by the seller.

Advantages

In a share disposal by a company(permanent and fixed assets), PIS and COFINS will not be levied, and the tax burden is limited to the imposition of IRPJ (25%) and CSLL (9%).

Disadvantages

Share disposals (current assets) are subject to PIS or COFINS at an aggregate rate of 4.65%.

There is no specific tax treatment for capital gains earned by companies. Capital gains are included with other revenues and are subject to IRPJ and CSLL.

The tax burden on capital gains is much lower for individual taxpayers (15% tax rate).

 

Transaction structures to minimise the tax burden

14. What transaction structures (if any) are commonly used to minimise the tax burden?

Generally, the structures used to minimise tax burden in Brazil are based on holding companies, vehicle companies and investment funds. However, the tax authorities can question and disregard these structures where there is shown to be a lack of economic substance or business purpose for using the structures.

Capital reduction/spin-off

A common structure used to minimise tax burden on corporate transactions is to transfer the asset to be sold to individuals who hold the equity of the company through a capital reduction or spin-off, to segregate the assets to be sold. Capital gain taxation for individuals has a lower tax burden, and is taxed at a rate of 15%.

Investment funds

A structure that is often used involves transferring the shares to a private investment fund (Fundo de Investimento em Participações (FIP)) in Brazil, which will hold the equity until the moment of disposal. Capital gains earned by the investment fund are not taxed until the moment that the fund is liquidated, as a general rule (there are also other specific triggering events in the legislation). However, the value at which shares are transferred to the fund can be challenged by the tax authority since under Interpretative Act RFB No 7/07, the transfer must be made at market value.

 

Asset acquisitions and disposals

Taxes potentially payable

15. What taxes are potentially payable on an asset acquisition/asset disposal?

The taxes potentially payable on an asset acquisition/asset disposal are as follows:

  • IRPJ and CSLL are levied at an aggregate rate of 34% (see Question 5) over the difference between the selling price and the book value of the assets (capital gain).

  • IOF is levied if the assets are sold to or by Brazilian non-residents (see Question 7).

  • ITBI is levied in real estate acquisitions/disposals (see Question 4).

  • PIS and COFINS are levied on current assets disposal.

 

Exemptions and reliefs

16. Are any exemptions or reliefs available to the liable party?

Disposals of permanent and fixed assets are not subject to PIS and COFINS (see Questions 5 and 10).

 

Tax advantages/disadvantages for the buyer

17. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

The advantages/disadvantages of an asset acquisition for the buyer depend on the specific characteristics of the transaction.

Advantages

In general, where a buyer is only buying one asset (and not an entire company), the buyer will not become responsible for the seller's tax liabilities (as would be the case if the entire company was bought). The buyer may also benefit from tax amortisation and depreciation of the asset cost.

Disadvantages

In a transfer of real asset, ITBI will be levied.

 

Tax advantages/disadvantages for the seller

18. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

The advantages/disadvantages of an asset disposal for the seller rely on the specific characteristics of the transaction.

Advantages

In an asset disposal by a company (permanent and fixed assets), PIS and COFINS will not be levied, although IRPJ (at 25%) and CSLL (at 9%) will be charged on the capital gain.

Disadvantages

If there is capital gain on the transaction, the seller must pay IRPJ and CSLL.

PIS and COFINS are levied on current assets disposal.

 

Transaction structures to minimise the tax burden

19. What transaction structures (if any) are commonly used to minimise the tax burden?

See Questions 12 and 14.

 

Legal mergers

Taxes potentially payable

20. What taxes are potentially payable on a legal merger?

Although the merger of two companies under Brazilian law is possible, companies are more likely to undertake an incorporation transaction. One of the main reasons for this is that the goodwill of the company being subsumed can be used as a deductible expense in the calculation of IRPJ and CSLL.

In both operations (merger and incorporation), the transaction results in the early closure of the fiscal year, which is used to calculate the tax basis of corporate taxes (this normally ends on 31 December). As a result, the company must file tax returns at the time of the merger or incorporation, resulting in an early payment of corporate taxes.

Since the transfer of assets can be made at book or market value, the tax treatment will vary accordingly. In addition, the nature of the assets and the terms of the operation will also establish the tax treatment levied on the asset transfer.

In both cases (merger and incorporation) the surviving company becomes responsible for all tax obligations and previous debts of the subsumed company that existed at the time of the transaction.

 

Exemptions and reliefs

21. Are any exemptions or reliefs available to the liable party?

Amortisation of goodwill. In an incorporation transaction, the incorporating company can use the goodwill as a deductible expense when calculating the tax basis for IRPJ and CSLL. Recently, new rules for amortisation of goodwill were established by Law No 12,973 of 13 May, 2014 and the method to determine the deductible goodwill amount was changed. In addition, the amortisation of goodwill is no longer permitted on internal transactions (involving share disposal or incorporation between related companies).

ITBI exemption. Article 156, §2º, I of the Federal Constitution provides that no ITBI will be levied on the transfer of real estate assets or real estate rights arising from a merger or incorporation, unless the buyer's predominant activity is related to real estate (see Question 4).

 

Transaction structures to minimise the tax burden

22. What transaction structures (if any) are commonly used to minimise the tax burden?

It is advantageous to ensure that the surviving company is the one with a greater number of accumulated losses (see also Questions 12 and 14).

 

Joint ventures

Taxes potentially payable

23. What taxes are potentially payable on establishing a joint venture company (JVC)?

The Brazilian commercial law does not establish the concept of a joint venture. Therefore, usually, the commercial structures available for this type of business are:

  • Special purpose vehicle (Sociedade de Propósito Específico) (SPE). This has legal personality and is taxed as any other incorporated company (see Questions 5 and 6).

  • Unincorporated participation (Sociedade em Conta de Participação) (SCP). This has no legal personality, as it represents only a contract between the parties, and the main party to the contract has their income taxed under this arrangement.

  • Consortium. This has no legal personality, and revenues and expenses of the operation are recognised between the contracting parties, following a percentage agreed by them. The net income is taxed under the general tax rules applied to companies, depending on the regime chosen by the parties (see Questions 5 and 6).

 

Exemptions and reliefs

24. Are any exemptions or reliefs available to the liable party?

A JVC does not benefit from any special exemption or relief, except for those granted to regular companies (see Question 23).

 

Transaction structures to minimise the tax burden

25. What transaction structures (if any) are commonly used to minimise the tax burden?

See Questions 12 and 14.

 

Company reorganisations

Taxes potentially payable

26. What taxes are potentially payable on a company reorganisation?

The IRPJ and CSLL are the most common taxes potentially payable on a company reorganisation. However, depending on the structure used, PIS, COFINS, IPI and ICMS may also become payable (see Questions 5 and 6).

 

Exemptions and reliefs

27. Are any exemptions or reliefs available to the liable party?

On a company reorganisation, the subsumed company can evaluate its tax liabilities on the book value of the assets that have been subsumed, so that there is no payment of IRPJ, CSLL, PIS or COFINS.

 

Transaction structures to minimise the tax burden

28. What transaction structures (if any) are commonly used to minimise the tax burden?

See Questions 12 and 14.

 

Restructuring and insolvency

29. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

There are no special tax implications for the business, so that the company continues with its ordinary tax obligations. Generally, the key tax matters to be considered in the context of restructuring procedures are potential tax succession and capital gains on the sale of assets or the payment of debts with discounts. Current legislation allows restructuring without succession in certain circumstances.

Recently, a special installment has been settled by the Brazilian Federal Government under Law No 13.043/2014, applied to companies and shareholders that are under judicial reorganisation. These companies under judicial reorganisation are allowed to pay their federal tax debts in up to 84 monthly installments.

Tax implications for the owners

If fraud occurs in the restructuring or insolvency procedures, it is possible to disregard the company's legal personality and assign personal liability for the debts to the company's partners and directors.

Tax implications for the creditors

There are no special tax implications for creditors.

 

Share buybacks

Taxes potentially payable

30. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Brazilian tax rules do not provide specific tax treatment for buyback transactions. Therefore, buyback transactions are subject to the same tax treatment applicable to capital gains on share acquisitions and disposals.

 

Exemptions and reliefs

31. Are any exemptions or reliefs available to the liable party?

The same exemptions and reliefs that apply to shares acquisitions and disposals apply to buyback transactions.

 

Transaction structures to minimise the tax burden

32. What transaction structures (if any) are commonly used to minimise the tax burden?

See Questions 12 and 14.

 

Private equity financed transactions: MBOs

Taxes potentially payable

33. What taxes are potentially payable on a management buyout (MBO)?

Brazilian tax rules do not provide specific tax treatment for MBOs. Therefore, the same tax treatment applied to capital gains on share acquisitions and disposals is applicable to these transactions.

 

Exemptions and reliefs

34. Are any exemptions or reliefs available to the liable party?

The same exemptions and reliefs that apply to share acquisitions and disposals apply to MBO transactions.

 

Transaction structures to minimise the tax burden

35. What transaction structures (if any) are commonly used to minimise the tax burden?

See Questions 12 and 14.

 

Reform

36. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

New rules of accounting: end of transition tax regime (Regime Tributário de Transição) (RTT)

At the end of 2007, Brazil adopted the International Financial Reporting Standards (IFRS) as its accountancy rules, with a few deviations regulated by the Committee of Accounting Procedures (Comite de Pronunciamentos Contábeis) (CPC). Until 2014, the Brazilian Federal Revenue Office did guarantee that the adoption of IFRS would be made fiscally neutral by the implementation of the RTT (that is, the calculation of IRPJ, CSLL, PIS and COFINS would follow the old accountancy rules).

In May 2014, Law No 12,973 of 2014 was issued and its main purpose was to extinguish the RTT and introduce a number of changes to the calculation of IRPJ and CSLL. This was to align the tax rules with international accounting standards that had been in place since 2007. These changes will take effect in 2015, but taxpayers may expect its effects in the second half of 2014. Until the enforcement of the new rules and the end of the RTT, the principle of tax neutrality remains valid.

The main changes introduced by Law No 12,973 of 2014 are:

  • A change in the definition of gross income that will affect the calculation of IRPJ, CSLL, PIS and COFINS.

  • The end of the RTT.

  • New rules for the taxation of investments in subsidiaries resident abroad.

  • New rules for merger and spin-off of companies.

  • New rules for the calculation of equity value of investments in subsidiaries.

  • Change in the calculation of interest on shareholder's capital.

  • Change in the rules for the calculation and use of goodwill on investments.

 

Brazilian taxes

The following taxes are relevant to corporate transactions in Brazil:

  • Corporate income tax (Imposto de Renda da Pessoa Jurídica) (IRPJ).

  • Withholding income tax (Imposto de Renda Retido na) (IRRF).

  • Social contribution on net profits (Contribuição Social sobre o Lucro Líquido) (CSLL).

  • Contribution for the social integration programme (Contribuição ao Programa de Integração Social) (PIS).

  • Contribution for the financing of social security (Contribuição para o Financiamento da Seguridade Social) (COFINS).

  • Excise tax (Imposto sobre Produtos Industrializados) (IPI).

  • Tax on financial transactions (Imposto sobre Operações Financeiras) (IOF).

  • Import duty (Imposto de Importação), export duty (Imposto de Exportação).

  • Contribution of intervention on economic domain (Contribuição de Intervenção no Domínio Econômico) (CIDE).

  • State value added tax (Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de Transporte Interestadual e Intermunicipal e de Comunicação) (ICMS).

  • Estate and gift tax (Imposto sobre Transmissão Causa Mortis e Doação de quaisquer Bens ou Direitos) (ITCMD).

  • Municipal tax on services (Imposto sobre Serviços de Qualquer Natureza) (ISS).

  • Real estate tax (Imposto sobre Transmissão de Bens Imoveis) (ITBI).



Online resources

Agenda of the President (Presidência da Republica Federativa do Brasil)

W www.planalto.gov.br

Description. Website containing Brazilian legislation (the Constitution, Law and Decrees).

Federal Supreme Court (Supremo Federal)

W www.stf.jus.br/portal/principal/principal.asp

Description. Website containing the jurisprudence of the Brazilian Supreme Court.

Superior Court of Justice (Superior Tribunal de Justiça)

W www.stj.jus.br/portal_stj/publicacao/engine.wsp

Description. Website containing the jurisprudence of the Brazilian Superior Court of Justice.

Brazil's Federal Revenue (Recei Federal do Brasil)

W www.receita.fazenda.gov.br

Description. Website containing the administrative rulings and jurisprudence of the Internal Revenue Service.

State Office of São Paulo (Secretaria da Fazenda do Estado de São Paulo)

Wwww.fazenda.sp.gov.br

Description. Website containing the administrative rulings and jurisprudence of the State Office of São Paulo.

National Tax Code (Código Tributário Nacional)

W www.planalto.gov.br/ccivil_03/leis/l5172.htm

Description. Website containing the National Tax Code.

Regulation of Income Tax (Regulamento do Imposto de Renda)

W www.planalto.gov.br/ccivil_03/decreto/d3000.htm

Description. Website containing the Brazilian Corporate Income Tax Code.



Contributor profiles

Mauricio de Carvalho Silveira Bueno, Partner and Head of the Tax Department

Lilla Huck, Otranto, Camargo Advogados

T + 55 11 3038 1066
F + 55 11 3038 1100
E mauricio.bueno@lhm.com.br
W www.lhm.com.br

Professional qualifications. Brazil, 2002.

Areas of practice. Tax litigation; superior courts; indirect taxation; tax planning and consultancy; corporate reorganisations; M&A transactions.

Non-professional qualifications

  • LLB, Pontificia Universidade Católica de São Paulo, 2001.
  • Tax Specialisation, Pontificia Universidade Católica de São Paulo, 2003.
  • Administrative judge at São Paulo State's Taxes Administrative Court (TIT-SP).

Languages. Portuguese, English.

Professional associations/memberships. International Bar Association (IBA); Brazilian construction law institute (IBDIC); Brazilian Bar Association (OAB); Tax Committee of Centro de Estudos das Sociedades de Advogados (CESA).

João Paulo de Seixas Maia Krepel, Partner

Lilla Huck, Otranto, Camargo Advogados

T +55 11 3038 1010
F +55 11 3038 1100
E joao.krepel@lhm.com.br
W www.lhm.com.br

Professional qualifications. Brazil, 2004

Areas of practice. Tax law; corporate transactions and restructuring; M&A.

Non-professional qualifications

  • LLB, Universidade de São Paulo, 2003.
  • Master's Degree of Economics, Fundação Getúlio Vargas, 2006.
  • LLM, Columbia University, 2010 (Harlan Fiske Stone Scholar title due his academic performance).

Recent transactions

  • Sale of a 49% stake of CIATC group to an investment vehicle controlled by 2+ Capital, a private equity fund created by the two founders of Boticário group.
  • Legal opinion to be used as an expert witness statement, in an arbitration proceeding before AAA’s International Center for Dispute Resolution, between Aquamarine Power Holdings, LLC. and Petrobras. The firm was engaged to prepare a legal opinion to be used by the Tribunal as a reference of the Brazilian Tax Law interpretation and analysis of tax credits under discussion between parties.
  • Tax advice to Grupo Rede Energia on its restructuring proceeding and sale of equity to Energisa Group.

Languages. Portuguese, English.

Professional associations/memberships. Member of the Brazilian Institute of Tax Law and the Brazilian Bar Association (OAB).

Isabel Garcia Calich da Fonseca, Partner

Lilla Huck, Otranto, Camargo Advogados

T +55 11 3038 1066
F +55 11 3038 1109
E isabel.calich@lhm.com.br
W www.lhm.com.br

Professional qualifications

  • LLB, Universidade Mackenzie, 2004.
  • BA, Fundação Getulio Vargas, 1999.
  • LLM in Tax Law, The London School of Economics and Political Science (LSE), 2007.
  • PhD in International Tax Law, The London School of Economics and Political Science, 2012.

Areas of practice. Tax law; corporate law; tax planning.

Languages. Portuguese, English

Professional associations/memberships. Member of the International Fiscal Association (IFA), the Brazilian Institute of Tax Law (IBDT), the Brazilian Association of Financial Law (ABDF) and the Brazilian Bar Association (OAB).

Publications. PhD thesis: "The impact of globalisation on the position of developing countries in the international tax system".


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