Tax on corporate lending and bond issues in Brazil: overview

A Q&A guide to tax on corporate lending and bond issues in Brazil.

This Q&A provides a high level overview of finance tax in Brazil and focuses on corporate lending and borrowing (including withholding tax requirements), bond issues, plant and machinery leasing, taxation of the borrower and lender when restructuring debt, securitisations, the Foreign Account Tax Compliance Act (FATCA) and bank levies.

To compare answers across multiple jurisdictions, visit the Tax on Corporate Lending and Bond Issues: 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 finance transactions in your jurisdiction?

Finance transactions are subject to federal taxes, which fall under the supervision of Brazil's Federal Revenue Secretariat (Secretaria da Receita Federal do Brasil) (RFB).

The following taxes are levied on financial transactions:

  • Withholding income tax (IRFonte).

  • Withholding tax on credit transactions (IOF/Credit).

  • Withholding tax on foreign exchange transactions (IOF/FX).

  • Withholding tax on insurance transactions (IOF/Insurance).

  • Withholding tax on transactions with bonds and securities (IOF/Securities).

Pre-completion tax clearances

2. Is it possible or necessary to apply for tax clearances from the tax authorities before completing a finance transaction?

Generally, it is not necessary to apply for tax clearances from the tax authorities before completing a finance transaction.

Circumstances for obtaining clearance

In the case of foreign entities or persons investing in Brazilian financial and capital markets who want to benefit from a special tax regime that includes exemptions to stock exchange transactions, before the inflow of funds, it is necessary to obtain registrations under the "2689 Regime" (foreign investors that adopt Resolution No 4,373/2014 from the Brazilian Central Bank, which means that they qualify as a "2689 Investor"). The 2689 Regime include registrations with the Brazilian Central Bank, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM) and the RFB. In order to qualify as 2689 Investor, the foreign investor must not reside in a tax haven jurisdiction.

Mandatory or optional clearance?

This clearance is necessary to become a 2689 Investor, but it is not necessary to invest in the Brazilian financial and capital markets.

Procedure for obtaining clearance

In order to become a 2689 Investor, the foreign entity or person should retain a Brazilian bank to be its/his representative in Brazil, and this bank will be in charge of obtaining the necessary registrations (which usually take few days to be obtained).

Disclosure of finance transactions

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

Circumstances where disclosure is required

Finance transactions must be disclosed to the tax authorities by all Brazilian resident companies and individuals.

Manner and timing of disclosure

Resident individuals. Financial investments must be included in the statement of assets that all Brazilian resident individuals must present to the authorities when they submit their income tax returns.

Resident companies. Financial investments are registered in the accounting books, and these accounting books must be sent on a monthly basis to the RFB, so that the financial investments are effectively disclosed to the RFB.

Brazilian financial institutions. Financial institutions must send to RFB:

  • On monthly basis, the total amount of federal taxes collected (these taxes are levied on financial transactions), including:

    • withholding income tax (IRFonte);

    • withholding tax on credit transactions (IOF/Credit);

    • withholding tax on foreign exchange transactions (IOF/FX);

    • withholding tax on insurance transactions (IOF/Insurance); and

    • withholding tax on transactions with bonds and securities (IOF/Securities).

  • On a quarterly basis, the sum of withdrawals that each taxpayer made during the period.

  • On an annual basis, financial institutions must disclose all income taxes withheld from foreign and resident investors, and include information on the type of transaction that generated such income.

In addition, the RFB has created a new obligation called e-Financeira in the context of implementing FATCA (see Question 22).

 

Taxes on corporate lending/borrowing

Taxes potentially chargeable on amounts receivable

4. What are the main corporate taxes potentially chargeable on interest and other amounts receivable under a loan?

Tax on credit transactions (IOF/Credit)

Key characteristics. IOF/Credit is a tax levied on any lending/borrowing transaction and, even though the borrower is the taxpayer, the creditor is responsible for calculating, withholding and collecting this tax. Loans from foreign creditors are currently exempt from IOF/Credit.

Calculation of tax. The calculation of this tax takes into account the term of the loan, so that the applicable rate will depend on the number of days duration of the loan. In the case of loans with predetermined amounts and maturity, IOF/Credit is charged on the principal amount disbursed to the borrower, and limited to 365 days, even if the loan is longer than that.

However, if there is no predefined amount (but rather a maximum to be lent that is available for the borrower to withdraw at anytime during the contract, such as a revolving facility), or no predetermined term (in which case the loan may be repaid partially or in total during the term of the transaction), then IOF/Credit is calculated on a monthly basis, applying the daily rate over the daily balance of the loan, which includes interest and any other charges determined by the contract.

Triggering event. IOF/Credit is triggered by the disbursement of the funds by the creditor to the debtor, or by novation or extension of the term of a loan.

Applicable rate(s). The applicable rates are 0.0041% per day (equivalent to 1.5% per year) for legal entities, and 0.0082% per day (equivalent to 3% per year) for individuals, plus 0.38% per transaction. IOF/Credit rates can be changed at any time at the President's discretion by up to 1.5% per day.

Tax on foreign exchange transactions (IOF/FX)

Key characteristics. IOF/FX is a tax levied on any conversion of foreign currency into Brazilian Reais (BRL), or conversion of BRL into any foreign currency. These conversions must be performed through Brazilian financial institutions or other entities authorised by the Brazilian Central Bank to operate with foreign currency.

Specifically in the case of a borrowing/lending transaction, IOF/FX is levied on inflows and outflows of funds corresponding to loans obtained from, or granted to, foreign entities or persons.

Calculation of tax. The calculation basis of this tax is the amount in BRL delivered or received as a result of the foreign exchange transaction.

Triggering event. IOF/FX is triggered by any transaction involving the inflow or outflow of funds into/from Brazil.

Applicable rate(s). The applicable rates for loans from foreign creditors are:

  • 6% on loans with a maturity of 180 days or less.

  • 0% on loans with a maturity of more than 180 days.

  • 0% on payments of interest or principal from Brazil.

The applicable rates when the creditor is based in Brazil are:

  • 0.38% on the remittance of principal.

  • 0.38% on inflows of interest or principal.

IOF/FX rates can be changed at any time at the President's discretion by up to 25%.

Tax on bonds and securities transactions (IOF/Securities)

Key characteristics. IOF/Securities is levied on any issuance, purchase, sale, redemption or liquidation of securities, including quotas of funds or bonds.

Calculation of tax. The calculation basis of IOF/Securities is the amount involved in the relevant transaction.

Triggering event. IOF/Securities is triggered when any of the above-mentioned transactions occur.

Applicable rate(s). Currently, the IOF/Securities rate on debt transactions is reduced to zero in most transactions, including transactions involving debt securities or bonds (except in the case of fixed yield investments that last for less than 30 days, including bonds).

Withholding income tax (IRFonte)

Key characteristics. IRFonte is a tax levied on interest payments from a Brazilian debtor to a local or foreign creditor. IRFonte is not levied where a local financial or insurance institution is the creditor.

Calculation of tax. The calculation basis of this tax is the amount of interest paid in BRL.

Triggering event. IRFonte is due when interest is made available to the creditor, which can occur when interest is paid to, credited to, delivered to, remitted to or used in favour of the creditor.

Applicable rate(s). The applicable rates for interest paid to foreign creditors are:

  • 0%, in the case of export financing where the principal is paid with export performance.

  • 15% as a general rule.

  • 25% where the beneficiary resides in a tax haven jurisdiction.

The applicable rates for interest paid to creditors in Brazil are:

  • 22.5% for interest paid up to 180 days from the date of principal disbursement.

  • 20% for interest paid between 181 and 360 days from the date of principal disbursement.

  • 17.5% for interest paid between 361 and 720 days from the date of principal disbursement.

  • 15% for interest paid after 720 days from the date of principal disbursement.

IRFonte is an advance payment of corporate income tax (IRPJ) for local creditors. Financial and insurance institutions are exempt from IRFonte, but the corresponding interest must be included in the calculation basis for IRPJ.

Corporate income taxes (IRPJ and CSLL)

Key characteristics. IRPJ and CSLL are taxes levied on corporate profits. Interest income must be included in the IRPJ and CSLL taxable basis.

Calculation of tax. The calculation basis of these taxes is the amount in BRL of earnings before taxes, adjusted by the additions and exclusions set out by the law. IRPJ and CSLL are calculated on annual basis with monthly advance payments.

Triggering event. The triggering event for IRPJ and CSLL is receiving taxable income, based on the actual or imputed (presumed) profit method.

Applicable rate(s). The applicable rates for IRPJ are:

  • Basic rate: 15%.

  • Additional rate: 10% on taxable income exceeding BRL240,000 per year, BRL60,000 per quarter or BRL20,000 per month.

CSLL rates are:

General rule: 9%.

Financial institutions, insurance companies and other companies authorised to operate by the Brazilian Central Bank or Brazilian Insurance Superintendence: 20% (the rate was increased from 15% to 20% on 1 September 2015).

Social contributions on revenues (PIS/COFINS)

Key characteristics. PIS/COFINS are social contributions levied on total revenues received by Brazilian companies.

Calculation of tax. The calculation basis of these taxes is the amount in BRL of the corresponding revenues. PIS/COFINS are calculated on a monthly basis.

  • The non-cumulative system. Contributions are generally taxed at the rates of 1.65% (PIS) and 7.6% (COFINS). Certain tax credits are available in specific situations.

  • The cumulative system. Contributions are generally levied at the rates of 0.65% (PIS) and 3% (COFINS). No tax credits are available.

In general, companies paying IRPJ and CSL under the actual profit method must adopt the non-cumulative system. Companies taxed under the presumed profit method must adopt the cumulative system.

Although the financial entities are subject to IRPJ and CSL in accordance with the actual profit method, they are subject to a modified PIS and COFINS cumulative system under which certain deductions are allowed, but the COFINS rate is increased to 4%.

Triggering event. Revenue accruing is the triggering event of PIS/COFINS.

Applicable rate(s). As it is considered financial income, the interest received by the Brazilian company taxed under the non-cumulative system and financial institutions (taxed in accordance with the cumulative system) will be subject to PIS and COFINS at a rate of 4.65%.

Tax reliefs available for borrowing costs

5. What corporate tax reliefs are available for borrowing costs (including interest and other amounts payable under a loan)?

Deductible expenses

Key characteristics. As a general rule, expenses are deductible for the purposes of IRPJ/CSLL when such expenses are normal/regular for the type of businesses conducted by a Brazilian company and, cumulatively, they are necessary for the maintenance of the corresponding source of income.

In the case of interest expenses, such expenses accrued by Brazilian companies are deductible for the purposes of calculating IRPJ/CSLL if such companies demonstrate that they used the corresponding funds in their operational activities.

Calculation of relief. The amount of deduction is the interest accrued and duly registered in the financial statements.

Triggering event. Interest is deductible on accrual basis.

Applicable rate(s). The benefit generated by interest deduction corresponds to 34% or 45% of such interest, depending on whether it is a non-financial or a financial entity.

Tax payable on the transfer of debt

6. What corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan?

Tax on foreign exchange transactions (IOF/FX)

Key characteristics. IOF/FX is a tax levied on any conversion of foreign currency into Brazilian Reais (BRL), or any conversion of BRL into any foreign currency. These conversions must be performed through Brazilian financial institutions or other entities authorised by the Brazilian Central Bank to operate with foreign currency.

Specifically in the case of a borrowing/lending transaction, IOF/FX is levied on inflows and outflows of funds corresponding to loans obtained from, or granted to, foreign entities or persons.

Specifically in the case of a transfer of debt, Central Bank legislation requires the Brazilian debtor to perform simultaneous foreign exchange transactions, without actual movement of funds, to change the creditor (one corresponding to liquidation of the original debt, and another corresponding to remittance of funds by the new creditor).

Even though these simultaneous foreign exchange transactions are required to update the Central Bank registration of the debt, from a tax perspective, it is equivalent to a novation, in such a way that:

  • If the transfer of debt occurs before completing 180 days from the original disbursement, IOF/FX at 6% will be due retroactively, that is, based on the date of the original disbursement, including a penalty of 20% and interest based on the SELIC rate (official interest rate for federal bonds) plus 1% in the month of the tax payment.

  • If the transfer of the debt occurs after 180 days from the original disbursement, no IOF/FX is retroactively due. However, if the new term of the debt is shorter than 180 days (counted from the amendment), then IOF/FX at 6% will be due.

Calculation of tax. The calculation basis of this tax is the amount in BRL delivered or received in view of the foreign exchange transaction.

Triggering event. IOF/FX is triggered by any transaction of inflow or outflow of funds into/from Brazil.

Applicable rate(s). The applicable rates for loans from foreign creditors are:

  • 6% on loans with a maturity of 180 days or less.

  • 0% on loans with a maturity of more than 180 days.

  • 0% on payments of interest or principal from Brazil.

The applicable rates when the creditor is based in Brazil are:

  • 0.38% on the remittance of principal.

  • 0.38% on inflows of interest or principal.

IOF/FX rates can be changed at any time at the President's discretion by up to 25%.

Liable party/parties. The liable party for IOF/FX is the Brazilian debtor.

Tax on credit transactions (IOF/Credit)

Key characteristics. IOF/Credit is a tax levied on any lending/borrowing transaction and, even though the borrower is the taxpayer, the creditor is responsible for calculating, withholding and collecting this tax. Loans from foreign creditors are currently exempt from IOF/Credit.

In the case of a transfer of debt, the key issue is to determine whether there is a novation or not. If no novation occurs, there is no additional IOF/Credit. However, if the transfer of debt is characterised as a new debt, then IOF/Credit will be due.

Calculation of tax. The calculation of this tax takes into account the term of the loan, so that the applicable rate will depend on the number of days duration of the loan. In the case of loans with predetermined amounts and maturity, IOF/Credit is charged on the principal amount disbursed to the borrower, and limited to 365 days, even if the loan is longer than that.

However, if there is no predefined amount (but rather a maximum to be lent that is available for the borrower to withdraw at anytime during the contract, such as a revolving facility), or no predetermined term (in which case the loan may be repaid partially or in total during the term of the transaction), then IOF/Credit is calculated on a monthly basis, applying the daily rate over the daily balance of the loan, which includes interest and any other charges determined by the contract.

Triggering event. IOF/Credit is triggered by a disbursement of the funds by the creditor to the debtor, or a novation or extension of the term of a loan.

Applicable rate(s). The applicable rates are 0.0041% per day (equivalent to 1.5% per year) for legal entities and 0.0082% (equivalent to 3% per year) for individuals, plus 0.38% per transaction. IOF/Credit rates can be changed at any time at the President's discretion by up to 1.5% per day.

Withholding tax

7. Is there withholding tax on interest or any other payments under a loan?

When withholding income tax (IRFonte) applies

IRFonte is a tax levied on interest payments from a Brazilian debtor to a local or foreign creditor. IRFonte is not levied where a local financial or insurance institution is the creditor.

Applicable rates of withholding tax

The applicable rates for interest paid to foreign creditors are:

  • 0%, in the case of export financing where the principal is paid with export performance.

  • 15% as a general rule.

  • 25% where the beneficiary resides in a tax haven jurisdiction.

The applicable rates where the creditor is based in Brazil are:

  • 22.5% for interest paid up to 180 days from the date of principal disbursement.

  • 20% for interest paid between 181 and 360 days from the date of principal disbursement.

  • 17.5% for interest paid between 361 and 720 days from the date of principal disbursement.

  • 15% for interest paid after 720 days from the date of principal disbursement.

IRFonte is an advance payment of corporate income tax (IRPJ) for local creditors. Financial and insurance institutions are exempt from IRFonte, but the corresponding interest must be included in the calculation basis for IRPJ.

Exemptions from withholding tax

Currently, there are no exemptions from IRFonte, except in the case of foreign governments and their wholly-owned entities provided that there is either:

  • Reciprocity in relation to interest obtained by the Brazilian government in the other country.

  • A treaty to avoid double taxation.

Multilateral agencies such as the IDB, the IMF and the World Bank are also exempt from IRFonte on interest received from Brazilian sources.

For a comparative summary of withholding tax on interest, see table, Withholding tax requirement on interest on corporate debt, and the key exemptions, in this global guide.

Guarantees

8. Do any particular tax issues arise on the provision of a guarantee?

The payment of guarantee fees to a Brazilian guarantor is subject to PIS/COFINS and IRPJ/CSLL. The payment of guarantee fees to a foreign guarantor is treated as a payment of services and is subject to:

  • IRFonte at 15%.

  • Withholding municipal tax on services (ISS) at up to 5%.

  • Special tax on royalties and services (CIDE/Royalties) at 10%.

  • Social contributions on importation (PIS/COFINS-Importation) at 9.25%.

Guarantee fees may be deductible for the debtor for the purposes of IRPJ/CSLL if the funds of the guaranteed debt transaction are used in its operational activities.

 

Bond issues

9. For corporate taxation purposes, are bonds treated any differently from standard corporate loans?

Bonds are not treated differently, and debt arising from a bonds issuance is treated exactly the same as other debts for corporate taxation purposes.

Taxes payable on the issue and/or transfer of a bond

10. What stamp, transfer or similar taxes are payable on the issue and/or transfer of a bond?

IOF/FX and IOF/Credit

In the case of bonds issued outside Brazil, the lender of records for Central Bank registration purposes is the paying agent (which is different from the position where there is a simple transfer of a loan). As a result, in the case of a transfer of such bonds, there are no adverse IOF/FX or IOF/Credit effects, since the lender of records has not been changed.

Withholding income tax (IRFonte) on capital gains

IRFonte on capital gains is levied where a foreign investor obtains gains on the sale of "assets located in Brazil".

There is still discussion concerning whether bonds issued outside Brazil by Brazilian companies qualify (or not) as "assets located in Brazil". If they do qualify as "assets located in Brazil", then any gains obtained by a foreign investor with the sale of those Brazilian bonds will be subject to IRFonte at 15% (or 25% where the beneficiary is located in a tax haven jurisdiction), to be withheld by the foreign buyer, who must appoint a representative in Brazil to perform the tax collection.

For the time being, there is no clear definition on this matter and, in practice, in most transactions IRFonte is not collected by the parties involved.

IRFonte on fixed yield investments

Calculation of tax. For a local issuances of bonds, such bonds are deemed to be fixed yield investments, and such investments are subject to IRFonte on the corresponding gains, to be withheld by the buyer. IRFonte is an advance payment of IRPJ for local creditors. Financial and insurance institutions are exempt from IRFonte, but the corresponding gains must be included in the calculation basis for IRPJ.

Triggering event. Obtaining gains upon the transfer of local bonds.

Liable party/parties. The seller is the taxpayer, but the buyer is responsible for withholding and collecting the tax.

Applicable rate(s). The applicable rates are:

  • 22.5% for interest paid up to 180 days from the date of the principal disbursement.

  • 20% for interest paid between 181 and 360 days from the date of the principal disbursement.

  • 17.5% for interest paid between 361 and 720 days from the date of the principal disbursement.

  • 15% for interest paid after 720 days after the date of the principal disbursement.

Exemptions

11. Are any exemptions available?

To address the need for large investments in long-term infrastructure projects, Law 12,431 of 24 June 2011 (Law 12,431/11) created "infrastructure debentures".

In very broad terms, infrastructure debentures can be understood as a sub-category of long-term bonds, as the issuance of infrastructure debentures must generally meet the same requirements as applicable to the issuance of long-term bonds. In essence, the issuance of infrastructure debentures becomes more appropriate if the investment in the issuing company is carried out by foreign investors together with local investors (and not only by foreign investors). This is because the favourable tax treatment only applies to a local investor in the context of infrastructure debentures.

Infrastructure debentures can be issued to finance infrastructure projects considered to be a priority for the federal government and must comply with the terms and conditions established by Law 12,431/11 and Decree 7603 of 9 November 2011 (Decree 7603/11). The issuance of infrastructure debentures by the issuing company offers the following advantages to Brazilian investors:

  • IRFonte applies at the rate of 0% when the earnings are paid to individual debenture holders resident in Brazil.

  • IRFonte applies at the rate of 15%, solely at source, when the earnings are paid to corporate debenture holders resident in Brazil.

 

Plant and machinery leasing

Claiming capital allowances/tax depreciation

12. What are the basic rules for enabling the lessor or lessee of plant and machinery to claim capital allowances/tax depreciation?

Business related assets are depreciated in accordance with the expected economic use of those assets. The most important requirement to be met before an asset can be depreciated is that the asset must be considered indispensable to the taxpayer's economic activity.

In addition, the opportunity to claim capital allowances/tax depreciation is only available to taxpayers taxed in accordance with the actual profit method. Such taxpayers can claim capital allowances/tax depreciation for IRPJ and CSLL purposes.

Amounts paid or credited under a commercial lease are considered as operational costs or expenses of the lessee. As a result, such amounts may be deductible from the IRPJ and CSLL tax base. This is subject to the requirement that the commercial lease be in accordance with Law No 6,099/1974. In summary, the transactions must be performed by either:

  • Legal entities that established the commercial lease as its principal activity.

  • Legal entities that centralise the commercial lease transactions in a specialised department with its own accounting bookings.

Otherwise, the transaction will be considered as a credit sale and, as a result, the sums already deducted by the lessee as operational costs or expenses must be added to the net income for the purposes of determining its taxable income. The tax due will be seen as a fine and will therefore include interest.

In addition, the taxpayer can also benefit from tax credits equal to the consideration paid or credited by virtue of a commercial lease contract for PIS and COFINS purposes. Some credits are allowed in relation to the depreciation of assets.

Once the lessee acquires the leased asset, depreciation deduction can be claimed, subject to the following conditions:

  • The lessee must have the control of the asset.

  • The lessee must use the asset in the production and/or commercialisation of goods and services.

  • The asset must have a determinable economic life greater than one year.

Due to the pressure of several companies and other relevant agents in the Brazilian market, Brazilian legislators have enacted Federal Law No 11,638/2007 to introduce the International Financial Reporting Standards (IFRS) into domestic law. As the general idea behind this law was to develop general principles applicable to accounting practices, rather than specific rules, it was decided that the interpretation of accounting matters should be centralised. This task is now being performed by the Brazilian Accounting Standards Board (Comitê de Pronunciamentos Contábeis) (CPC). Among other rulings, the CPC has issued Accounting Statement No 6 (CPC 06), which provides for a new accounting treatment of leases, for both the lessor and the lessee.

A financial lease is defined under CPC 06 as a transaction where all risks and benefits inherent to the ownership of a given asset are substantially transferred, irrespective of whether the ownership of the asset has been transferred or not. On the other hand, in an operational lease, all risks and benefits inherent to the ownership of a given asset are not substantially transferred.

Under CPC 06, the lessee must post the financial lease in specific accounts as assets and liabilities at the beginning of the lease term. The lessee will be allowed to recognise depreciation expenses related to the leased asset, as well as financial expenses, for accounting purposes.

Law No 11,638/2007 applicable to commercial lease transactions will not give rise to adverse Brazilian tax consequences. This is due to the fact that current tax legislation (Law No 11,941/2009) provides that, for tax purposes, the recognition of taxable income will be determined based on the accounting rules in place on 31 December 2007, under which the leased assets were not accounted as an asset of the lessee, but rather considered as a deductible expense. Although Law No 12,973/2014 revoked the above-mentioned provisions of Law No 11,941/2009, the tax treatment for the financial lease remains the same.

Therefore, lease payments are generally deductible provided the lease agreement complies with the applicable legislation. This tax deduction is allowed as of the date of payment (and not according to the depreciation of the asset). However, lease agreements have been recorded as long-term purchase and sale agreements for accounting purposes following the adoption of the IFRS. As a result, most companies recognise only depreciation expenses for accounting purposes.

Rate of capital allowances/tax depreciation

13. What is the rate of capital allowances/tax depreciation; does it depend on the type of assets?

The annual rate of tax depreciation depends on the type of assets. The rates are established by the RFB and can vary from 4% to 50%. In addition, tax legislation provides for an immediate deduction (depreciação acelerada) in some specific cases as a tax incentive.

Lessees not carrying on business in the jurisdiction

14. Are there special rules for leasing to lessees that do not carry on business in your jurisdiction?

There are no special rules for leasing to lessees that do not carry on business in Brazil. The special rules are only applicable to lessors that do not carry business in Brazil.

Taxation of rentals

15. How are rentals taxed?

Rentals are subject to IRPJ and CSLL at an overall rate of 34%. However, for financial institutions, the applicable rate is 45%. PIS and COFINS are payable at the overall rate of:

  • For taxpayers adopting the non-cumulative method: 9.25%.

  • For taxpayers adopting the cumulative method: 3.65%.

  • For financial institutions: 4.65%.

In general, the above taxes are payable on a monthly basis throughout the duration of the contract, irrespective of whether the payment has been received.

Rulings and clearances

16. Is a ruling or clearance necessary or common?

It is not necessary (or common) to request a ruling or clearance for Brazilian tax purposes.

 

Restructuring debt

Unpaid or deferred interest or capital

17. What is the tax treatment of the borrower and the lender if interest or capital is unpaid or deferred?

The tax treatment of the borrower and the lender depends on whether the party uses the cash or accrual regime. In general, most taxpayers adopt the accrual regime and, therefore, the lender still needs to include the interest payments in its income and the borrower continues to deduct the interest accrued as an expense.

The lender can write off its credit as a tax deductible loss when there is no reasonable likelihood that the interest and the principal will be paid, provided that some specific requirements are met (see Question 18).

Debt write-off/release and debt for equity swap

18. What is the tax treatment of the borrower and lender if a loan is:
  • Written off or released (wholly or partly)?

  • Replaced by shares in the borrower (debt for equity swap)?

For the lender, the written-off credit can be deductible as an incurred loss. In general, the deductibility of the loss is subject to:

  • The adoption by the lender of a series of administrative and/or judicial measures.

  • Lapse of a certain period from the maturity of the debt (grace period).

The measures to be taken by the lender can vary with the:

  • Value of the defaulted loans.

  • Legal situation of the debtor (for example, if the debtor is bankrupt).

  • Presence or absence of an in rem guarantee.

The borrower must include the written-off or released loan in its tax base for IRPJ, CSLL, PIS and COFINS purposes.

A debt-for-equity swap, from a tax perspective, will be treated as a settlement of the loan (see Question 4).

 

Securitisation

19. Briefly explain the key features of the tax regime applicable to securitisations, including details of any specific tax rules that apply or issues that arise in relation to securitisations.

The originators of receivables usually assign them to Brazilian securitisation companies, which are set up as corporations that issue securities to investors to raise funds. The securitisation companies, as a rule, are entitled to a spread in such transactions (the difference between the funding costs and income arising from the receivables acquired), which is subject to ordinary corporate taxation in Brazil (see Question 4).

As a result of the assignment/sale of the receivables to the securitisation company, the originator receives upfront amounts related to such credits. Under the tax legislation, the income related to such transactions must be taxed on an accrual basis. For example, in a securitisation of real estate leases, the funds due to the originator (landlord) in the assignment transaction are subject to taxation over the period of the lease agreement.

As a rule, no IOF/Credit is payable on the assignment of the receivables to the securitisation company, based on the argument that such a transaction comprises a true sale and not a loan. However, in the event that there is recourse to the originator, the tax authorities may attempt to impose the IOF/Credit on such transactions.

Foreign Account Tax Compliance Act (FATCA)

20. Has your jurisdiction entered into an intergovernmental agreement (IGA) to implement FATCA, or do you intend to enter into an IGA to implement FATCA?

On 15 May 2013, Brazil formally promulgated a Tax Information Exchange Agreement (TIEA) with the US. This agreement became effective in Brazil as a response to the implementation, by the US, of their Foreign Account Tax Compliance Act (FATCA).

The TIEA covers federal income taxes, federal taxes on self-employment income, federal estate and gift taxes and federal excise taxes for the US. For Brazil, the TIEA applies for the following taxes:

  • Individual and corporate income tax (IRPF and IRPJ, respectively).

  • Industrialised products tax (IPI).

  • Financial transactions tax (IOF).

  • Rural property tax (ITR).

  • Contribution to the social integration the programme (PIS).

  • Social contribution for the financing of the social security (COFINS).

  • Social contribution on net profits (CSLL).

More recently, in addition to the TIEA, Brazil also approved an intergovernmental agreement (IGA) with the US for the specific purpose of facilitating the compliance of Brazilian financial institutions (or Brazilian branches of financial institutions) with the provisions of FATCA.

Based on the IGA, Brazilian financial institutions (or branches of foreign financial institutions) must identify the accounts of individuals or legal entities of the US (a definition that includes legal entities not incorporated in the US, but controlled by individual or American companies) and transmit annually to the Brazilian IRS specific information regarding these accounts. The IGA allows Brazilian financial institutions to fulfill the terms of FATCA, the purpose of which is to obtain information of American individuals and legal entities abroad.

Note that the first exchange of information will occur in September 2015, but first the President must approve and promulgate the IGA.

 
21. Have there been any particular difficulties in light of your jurisdiction's domestic legislation with implementing the FATCA requirements?

There have been no particular difficulties in light of Brazil's domestic legislation with implementing the FATCA requirements.

 
22. Are there any provisions of your jurisdiction's IGA and/or domestic implementing legislation, if any, that are more onerous than the US FATCA requirements?

The Brazilian IRS created an ancillary obligation (called e-Financeira) through the issuance of Normative Instruction RFB No 1,571/2015 enabling Brazilian financial institutions to comply with the requirements of FATCA.

However, the e-Financeira encompasses not only information regarding American accounts, but also the information of all other accounts held by individuals and companies with these financial entities and similar entities (such as stock brokers and investment fund managers, among others), which must also be delivered to the Brazilian IRS.

 

Bank levies

23. Are there any bank levies or similar taxes imposed specifically on financial institutions?

There are no bank levies or similar taxes imposed specifically on financial institutions (see Question 4).

 
24. On what are any such levies or taxes charged?
 
25. At what rate(s) are the levies or taxes charged?
 
26. Are there any thresholds or exemptions?
 

Reform

27. Please summarise any proposals for reform that will impact on the taxation of finance transactions described above.

Disclosure of aggressive tax planning

The Brazilian Government recently enacted Provisional Measure (MP) No 685 on 21 July 2015, creating an obligation on taxpayers to disclose aggressive tax planning. Even though this MP is enforceable immediately, the actual disclosure still depends on regulations to be issued in the near future. In addition, the MP is a temporary law that is submitted to the Brazilian Congress, who can, within 120 days, either:

  • Approve it.

  • Reject it.

  • Approve it with changes.

  • Do nothing.

If the Congress does not approve the MP within 120 days, the MP expires and ceases to have any effect.

MP No 685 establishes an obligation on the taxpayer to inform the RFB of any operations and acts or legal transactions that result in the suppression, reduction or deferral of tax.

This ancillary obligation to inform must be made when the taxpayers are involved in:

  • Legal acts or transactions practiced without a relevant purpose other than tax purposes.

  • Acts that are not usual, or indirect legal transactions, or legal transactions that contain any clause that denatures, even partially, the nature of a typical agreement.

  • Specific acts or legal transactions listed by the RFB (not yet published).

The taxpayer will deliver one tax return per set of transactions practiced in an interconnected form, under the terms of the pending regulations.

Manner and timing of disclosure

This ancillary obligation to inform must be made by the taxpayers until 30 September of the respective year (including 2015).

The RFB can either agree with, or disagree with, the transactions practiced by the taxpayer and, when there is a disagreement, the taxpayer will be notified to pay (or be requested to pay in installments) the taxes due with arrears interest within 30 days. No penalty will apply provided that this 30-day period is complied with. This exemption from a penalty does not apply where the taxpayer presents the declaration after the RFB has started a tax inspection.

If the information required is not provided, or is provided with incomplete or incorrect information, this will constitute tax fraud and the RFB will charge the taxes due with a penalty (150% of the taxes due) and interest.

Note that the RFB has not yet issued the regulations clarifying the manner in which this new obligation to inform must be provided.

 

Online resources

Legislação

W www4.planalto.gov.br/legislacao

Description. The official Government website containing up-to-date legislation.



Contributor profiles

Ana Claudia Akie Utumi, Head of Tax

TozziniFreire Advogados

T +55 11 5086 5000
E autumi@tozzinifreire.com.br
W www.tozzinifreire.com.br

Qualified. Brazil, 1994.

Areas of practice. Taxation; corporations and individuals; tax planning; taxation on M&A transactions; cross-border transactions; corporate reorganisations; wealth and succession planning.

Victor Chiu Shieh, Full Associate

TozziniFreire Advogados

T +55 11 5086 5000
E vshieh@tozzinifreire.com.br
W www.tozzinifreire.com.br

Qualified. Brazil, 2010.

Areas of practice. Taxation; corporations and individuals; tax planning; taxation on M&A transactions; cross-border transactions; corporate reorganisations; wealth and succession planning.

Manuela Madeira Calheiros, Full Associate

TozziniFreire Advogados

T +55 11 5086 5000
E mcalheiros@tozzinifreire.com.br
W www.tozzinifreire.com.br

Qualified. Brazil, 2011.

Areas of practice. Taxation; corporations and individuals; tax planning; taxation on M&A transactions; cross-border transactions; corporate reorganisations; wealth and succession planning.


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