Foreign companies have increased their interest in the Brazilian market and domestic companies have finally found room to expand their activities overseas and become multinationals. Machado Associados started its activities in 1990, initially as a tax boutique. Its tax expertise came from the wide experience of its founders who had previously worked as partners in charge of tax departments of large international audit and consulting firms. As the years passed and due to the clients’ needs, the firm started to develop the corporate and M&A areas, which currently comprise almost one-third of the personnel.
Over two decades of activities, the team has grown and the practice areas have diversified. The firm currently has 110 highly-qualified professionals, half of whom specialise in all areas of tax law, including direct and indirect taxes, litigation, international matters and transfer pricing. The firm provides legal services in all major areas of business law including the areas mentioned above, as well as foreign investment, labour, anti-trust and regulatory. The main office is based in São Paulo with branches in Brasília, Rio de Janeiro and Chicago. We also have corresponding offices in all the other Brazilian states.
2010 has been a great year for the Brazilian economy. Differently from other markets, the Brazilian market has experienced a significant growth and M&A transactions have finally reborn. Owing to this movement, foreign investments have increased in Brazil.
There is also a positive picture in outgoing investments. Over the last few years, several Brazilian companies have prepared themselves to face the international markets and the globalisation phenomenon. Aiming at following this internationalisation process, for the last 10 years the firm has deeply invested in the development of an international (tax and corporate) area and a closer relationship with top ranked tax firms abroad (in Latin America, Europe, Asia and the US).
In the US, the firm is represented by Miguel Valdés, an expert in US tax law, with emphasis on international tax restructuring, mainly as regards Latin American countries. Miguel has been the resident partner of the Chicago office since 2002. Before joining the firm, he was the partner in charge of the Latin America Business Centre of Ernst & Young (Chicago, US), partner of Mayer, Brown & Platt (now Mayer Brown LLP) and partner of Coopers & Lybrand (Chicago, US). In 2002, he was appointed by the International Tax Review as one of the main US tax experts in Latin America in their list of the world’s leading tax advisers.
Miguel is also the president of the Latin America Tax and Legal Network (Lataxnet), an international network of top ranked firms specialising in legal and tax matters in Latin America and the Caribbean. Based on a “best-friend” relationship, Lataxnet affords us the opportunity of working on and coordinating projects in several areas, simultaneously, in every country of Latin America.
Erika Tukiama is one of the partners in charge of the international tax area. She is based in São Paulo, graduated in 2000 from the Law School of São Paulo University (USP), and received her postgraduate dedgree in 2002 from the Brazilian Institute of Studies in Tax Law (IBET). Erika is an active member of international associations (such as the International Bar Association, the International Fiscal Association and the Fiscal Committee of Union Internationale des Avocats) and has been part of the team and assisting clients, mainly Brazilian companies expanding their activities abroad, for the last seven years.
Unfortunately, the firm was not the only one who bet on the booming of the Brazilian market and the growth of cross-border transactions involving Brazil. In this respect, the Brazilian government and the Federal Revenue Service (RFB) have also done their homework by enacting, in the last years, several tax rules and regulations governing tax matters and giving rise to a huge bureaucracy, high tax burdens and tax contingencies.
Brazilian tax rules, when compared with other tax systems, are indeed very broad, unclear and burdensome and RFB’s position on international tax matters has become increasingly controversial.
As with profits earned overseas, Brazil imposes taxation on any profits recorded by a controlled or affiliated company residing abroad. Taxes must be paid by the Brazilian parent company on December 31 of each year, irrespective of actual distribution, nature of income (active or passive) or country of residence of the foreign subsidiary (tax haven or not).
As shown above, Brazilian rules aim at reaching all profits earned abroad on an accrual basis and, therefore, do not follow the scope of traditional CFC (controlled foreign companies) rules, whose main purpose is to avoid tax evasion and abusive international structures.
Tax assessments against Brazilian companies with investments abroad have become more frequent and tax authorities have now started to challenge international structures, incorrect use of tax treaties and unsatisfactory documentation for purposes of tax reliefs in Brazil.
Against an international trend, Brazil has also enlarged its tax haven definition and introduced a new concept of privileged tax regime. Grounded on recent laws, the RFB has published new black and grey lists.
According to the new black list, 65 jurisdictions (as opposed to the 53 stated in the former list) were classified by the RFB as tax havens, understood to be those countries or locations: (i) that do not tax income or tax it at rates lower than 20 percent, and/or (ii) whose legislation does not allow access to information regarding the shareholding structure of legal entities or their ownership. Among the changes introduced, there was the inclusion of Switzerland. Malta and the holding companies governed by the Luxembourg Law of 1929 were excluded from the tax havens list and listed as privileged tax regimes.
According to the new grey list, legislations of nine jurisdictions were included in the privileged tax regimes list, among which are Uruguay, as regards the SAFIs (“sociedad anónima financiera de inversion”); the US, as regards certain state LLCs (limited liability companies); Spain, as regards the ETVEs (“entidad de tenencia de valores extranjeros”); and the Netherlands, Denmark and Luxembourg, as regards legal entities incorporated as “holding companies” (in relation to the Netherlands and Denmark, only those that do not perform substantial economic activities are to be considered privileged tax regimes).
In our view, Brazil’s position is not in accordance with the measures that have been adopted by other world countries, which have been increasingly restricting their black lists.
The Brazilian new lists have already started to cause negative impacts abroad. Due to that, the RFB allowed governments from the listed countries to file appeals for the revision of their classification within such lists. Based on this permission, some appeals have already been presented and RFB’s acts have been issued in order to temporarily grant suspensive effects to the inclusion of the Netherlands in the list of privileged tax regimes and of Switzerland in the tax havens list.
Following a global trend, thin capitalisation rules were introduced in Brazil and apply to payments of interest: (i) to related foreign individuals or legal entities; (ii) to individuals or companies domiciled in tax havens; (iii) arising from transactions carried out under privileged tax regimes; and (iv) arising from transactions under the intervention of foreign related parties, residents in tax havens or parties subject to privileged tax regimes.
Interest paid to foreign related parties, not incorporated in tax havens or under privileged tax regimes, shall be tax deductible if:
– The debt amount with the foreign related party does not exceed two times the net worth value of the related party’s investment in the Brazilian company (individual limit). In case no shareholding relationship is present, this individual limit shall correspond to twice the net worth of the Brazilian company; and
– The sum of all debts with foreign related parties does not exceed two times the sum of all net worth values of related parties’ investments in the Brazilian company (collective limit).
Interest paid to beneficiaries resident in tax havens or arising from transactions under privileged tax regimes shall be tax deductible if the sum of debts with such foreign entities does not exceed 30 percent of the net worth of the Brazilian company.
Several issues have been left unclear by law, such as the lack of guidance to: (i) calculate the non-deductible portion of interest and (ii) apply the thin cap rules in view of other interest deductibility rules currently in force in Brazil.
Difficulties as those seen above have indeed increased the need for careful analysis of Brazilian rules, as well as a previous evaluation of the risks involved.
Miguel Valdés and Erika Tukiama are partners of the international tax area of Machado Associados