Normative Instruction No. 1,658/2016, published on 14th September 2016 in the Official Gazette, included Ireland1, St. Maarten and Curaçao (the last two as a result of the dissolution of the Netherlands Antilles) in the tax haven blacklist currently in force in Brazil, as well as Austrian holding companies in the list of privileged tax regimes.
In this regard, remittances of royalties, and payments of services or interest to beneficiaries domiciled in these jurisdictions will be subject to higher withholding income tax rates in Brazil (25%), given that such territories do not tax income or apply income tax rates lower than 20%, and/or provide for corporate secrecy of companies’ corporate structures.
Furthermore, it is important to mention that transactions performed between individuals or entities resident or domiciled in Brazil and those domiciled in these jurisdictions will also be subject to thin capitalization and transfer pricing rules in Brazil, even if such parties are not considered to be related parties for tax purposes.
The Normative Instruction also provides an explanation of entities with substantial economic activities for the purpose of identifying Danish and Dutch holding companies as privileged tax regimes. In accordance with such rule, companies with “substantial economic activities” are those with productive capacity, evidenced by the existence of a physical establishment for the exercise of effective management and decision making, and its capability of generating, in their country of residence, qualified employment and revenues.
This measure, in line with the measures included in the BEPS2 package, is a clear effort to undermine tax avoidance maneuvers, distinguishing essentially active entities from those that develop out of “abusive” tax planning with the specific purpose of reducing tax burdens, and is also in line with: (i) the requirement set forth by Normative Instruction No. 1,634/2016 to disclose, as from 1st January 2017, the final beneficiaries of cross-border transactions (i.e. those individuals or entities who, directly or indirectly, own, control or have significantly influence in particular entities, or on whose behalf the transactions are conducted), as well as (ii) the implementation of FATCA rules (under the enactment in Brazil of the “Convention on Mutual Administrative Assistance in Tax Matters”3) which will also come into effect on 1st October 2016 to promote the exchange of financial and tax information and mutual assistance for the effective collection of taxes and recovery of foreign assets among the signatory jurisdictions.
Within this context, specialized advice on cross-border transactions becomes even more essential, since the recent measures described above enables the Brazilian Federal Tax Authority to effectively target tax avoidance attempts via triangular transactions or corporate restructuring lacking economic substance and business purpose.
1 Northern Ireland is not included in such rules, since it is part of the United Kingdom, which, as expected, is considered by the Brazilian Federal Tax Authority as an independent territory for tax purposes.
2 Base Erosion and Profit Shifting.
3 Pursuant to Decree No. 8,842/2016 published in the Official Gazette on 30th August, 2016.