Administration
& Case Law
Brazil
Normative Instruction released providing for
regulation of the Brazilian controlled foreign
corporation rules
On December 8, 2014, Brazilian Federal Revenue
Authorities (RFB) published Normative Instruction (NI)
1,520/2014, regulating the controlled foreign corporation
(CFC) rules introduced by Law No. 12,973/2014.
This article provides a summary of some of the key issues considered
by NI 1,520/2014.
Sub-account recognition and registration
Pursuant to Law No. 12,973/2014, Brazilian parent companies are
required to maintain sub-accounts in which changes in the value
of their foreign investments, corresponding to profits or losses of
directly and/or indirectly controlled subsidiaries should be recognised
in proportion to the Brazilian parent company’s participation. NI
1,520/2014 confirms that the variation must be booked in sub-accounts
for each direct or indirect controlled company.
NI 1,520/2014 also confirms that the results of the directly or
indirectly held CFC should not contain income earned by another
entity over which the Brazilian entity continues to have direct or
indirect control. Further, NI 1,520/2014 provides guidance in relation
to how the sub-accounts for CFCs should be valued from an accounting
perspective, including in circumstances where cash is distributed.
Durval Portela Philippe Jeffrey
São Paulo São Paulo
T: +55 11 3674 2582 T: +55 11 3674 2271
E: durval.portela@br.pwc.com E: philippe.jeffrey@br.pwc.com
Consolidation
NI 1,520/2014 confirmed that the Brazilian parent company should
only be able to consolidate results until the end of 2022, where certain
conditions set out in Law No. 12,973/2014 are satisfied.
Broadly, these include:
• the subsidiary is located in a jurisdiction that has a tax treaty
or a specific information exchange agreement in place (or
electronically provides its financial statements)
• the subsidiary satisfies the ‘active income’ test (i.e. having active
income of equal to or greater than 80% of total income), and
• the subsidiary is not located in tax haven, sub-taxation
jurisdiction (i.e. jurisdiction in which the nominal rate is less than
20%) or subject to a privileged tax regime or controlled directly/
indirectly by such an entity.
NI 1,520/2014 provides that although the choice to consolidate their
profits and losses is irrevocable for each calendar year, the Brazilian
parent company may elect which of its CFCs it wishes to consolidate.
The Brazilian taxpayer may only consolidate results of its CFCs once
per calendar year.
Availability of positive results earned abroad
NI 1,520/2014 confirmed that profits of branches, affiliates, or
controlled subsidiaries located abroad should be included in the
calculation of the Brazilian entity’s taxable income on 31 December
of the calendar year in which the profits are made available to the
Brazilian entity. The timing for when profits are considered to be
made available to the Brazilian entity will generally depend on the
classification of the particular CFC (i.e. as an affiliate or a controlled
subsidiary). Broadly speaking with controlled subsidiaries being taxed
on an accruals basis while affiliates that satisfy certain conditions may
be eligible for CFC taxation on a cash basis.
Mark Conomy
São Paulo
T: +55 11 3674 2519
E: conomy.mark@br.pwc.com
www.pwc.com/its
For controlled subsidiaries, the profits to be included in the Brazilian
entity’s taxable income should be determined based on the controlled
subsidiary’s local corporate legislation. Absent rules regulating
the preparation of financial statements in the relevant country, the
results to be included in the Brazilian entity’s taxable income should
be calculated based on the general accounting principles adopted
in Brazil.
In addition to the general rules in respect of when profits are made
available, NI 1,520/2014 provides specific guidance around when
profits will be considered to be made available in certain circumstances
such a closure or liquidation of the Brazilian company that holds
foreign branches, affiliates and/or controlled subsidiaries, closure of a
foreign branch, affiliate and/or controlled subsidiary, merger or sale of
a foreign branch, affiliate, and/or controlled subsidiary.
Taxation of profits earned by affiliates
As noted above, Law No. 12,973/2014 provides for distinct tax
treatment in respect foreign affiliates. For affiliates, NI 1,520/2014
confirms that profits will only be considered available to the Brazilian
parent company when credited, paid or in other specific circumstances
defined by the legislation. Therefore, the profits earned by the foreign
affiliate should generally only be taxable in Brazil on 31 December of
the year in which they were actually distributed to the Brazilian entity,
provided that the affiliate satisfies certain conditions outlined in the
new legislation.
Losses
NI 1,520/2014 confirmed that losses (including accumulated losses
prior to January 1, 2015) of the directly or indirectly controlled foreign
subsidiary may be used to offset future profits of the same entity
provided that they are disclosed and recorded appropriately.
continue
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Deductibility of transfer Pricing and thin On November 14, 2014, Law No. 13,043/2014 extended the list again
capitalisation adjustments to include ‘other general industries’. However, it should be noted that
NI 1,520/2014 confirmed that transfer pricing and thin capitalisation the latest inclusion set forth in Law No. 13,043/2014 has not been
adjustments made in relation to the Brazilian entity’s dealings with considered in NI 1,520/2014.
its foreign branches, affiliates treated as controlled subsidiaries or
Deferral of tax payments
controlled subsidiaries may be deducted for corporate income tax (CIT)
Where certain conditions are satisfied, taxpayers may be eligible to
purposes where these adjusted amounts are reflected in the Brazilian
defer the payment of taxes in relation to their CFCs in proportion to
entity’s taxable basis for corporate income purposes and the tax has
the profits distributed in subsequent years. In such circumstances, a
been paid in Brazil on these adjustments.
deemed distribution of 12.5% of the positive results will occur in the
Foreign tax offsets following year with the remaining balance deemed to be distributed
Furthermore, the aforementioned NI confirmed that a deduction may in the eighth year following the assessment (if not previously
be taken for income tax paid abroad by a foreign controlled subsidiary, distributed). Deferred tax payments should be subject to interest at
in proportion to the Brazilian entity’s participation, up to the amount London Inter Bank Offered Rate (LIBOR).
of tax payable in Brazil in relation to the foreign income. Withholding
Other measures
tax (WHT) is specifically included in the deductible tax paid abroad.
NI 1,520/2014 also sets out the ancillary filing obligations and
For affiliates eligible to apply the CFC rules on a cash basis, the foreign
specific forms that will need to be completed to comply with Law No.
tax offset should be limited to the WHT paid on the dividends included
12,973/2014.
in the Brazilian parent company’s taxable income.
Presumed credit
Law 12,973/2014 provides that until calendar year 2022, Brazilian PwC observation:
parent companies may deduct up to 9% as a presumed/deemed NI 1,520/2014 provides guidance to taxpayers navigating some of the
credit on a CFC’s positive results where the CFC is engaged in the practical aspects of the new Brazilian CFC rules. Brazilian taxpayers
manufacture of food/beverage products and the construction of that have CFCs should review their procedures in light of the NI to
building/infrastructure projects and certain other conditions are determine how they may be impacted by the new regulations.
satisfied. Law No. 12,973/2014 provided that the list could be extended
to include additional activities.
On September 29, 2014, Ministry of Finance (MOF) issued Ordinance
427/2014 extending the list of activities eligible for the credit to
include: manufacturing, mineral extraction and exploitation (under
public concession contracts), of public assets located in the country of
residence of the CFC entity.