BRAZIL Law and Practice Contributed by: Júlio de Oliveira, Stephanie Makin, Gabriel Lacerda and Carlos Augusto Cruz, Machado Associados
6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Brazilian companies are taxed on their worldwide income. Capital gains and income earned abroad, as well as the profits accrued by branches, affiliated companies or direct and indirect controlled compa - nies abroad, are included in the taxable basis of IRPJ/ CSLL at a general rate of 34% in the year they are accrued, regardless of their distribution or availability to the Brazilian controlling company. To avoid double taxation, Brazilian legislation allows Brazilian companies to offset the income tax paid abroad with the IRPJ and CSLL due in Brazil, up to the limit of the IRPJ and CSLL levied in Brazil on such income. 6.2 Non-Deductible Local Expenses Foreign income is not exempt in Brazil, so there are no rules limiting the deduction of local expenses because of attribution to exempt foreign income. 6.3 Dividends From Foreign Subsidiaries Because profits earned by foreign subsidiaries are included in the taxable basis of the IRPJ/CSLL of the controlling Brazilian company in the year that such profits accrued, dividends paid by subsidiaries are not taxed at the moment of their distribution. 6.4 Taxation of Intangibles Developed by Local Corporations The licensing of an intangible developed by a Bra - zilian company to a related party abroad is subject to Brazilian transfer pricing rules and thus should be compensated according to the arm’s length princi - ple. Corresponding compensation or transfer pricing adjustment is subject to the IRPJ/CSLL. 6.5 Controlled Foreign Corporation-Type Rules Brazilian worldwide taxation rules tax profits earned by any subsidiary, affiliate or branch abroad. In view of this broad application of worldwide taxation, it is arguable that the Brazilian rules could be considered as controlled foreign corporation (CFC)-type rules.
There are no rules providing for taxation on the indirect sale of stock of a Brazilian company. 5.4 Tax Implications of Change of Control Brazilian tax legislation does not provide any rules for taxation on the indirect sale of stock of a Brazil - ian company. However, if the Brazilian tax authorities understand that a foreign holding company was used to avoid the triggering of taxation on capital gains in Brazil, they could disregard the holding company and consider that the price was paid for the acquisition of local company stock and thus subject to capital gain taxation as described in 5.3 Capital Gains of Non- Residents . There was an attempt to include change- of-control provisions in Brazilian tax legislation in the past, but it was unsuccessful. 5.5 Formula-Based Income Attribution Brazilian subsidiaries and branches are subject to the same rules for determining taxable income as described in 2.1 Taxable Profits , regardless of wheth - er they are locally or foreign-owned. 5.6 Deductibility of Intra-Group Management and Administrative Charges As a general rule, in order for an expense to be deduct - ible it is necessary to prove that such expense is nec - essary, usual and normal for the performance of the company’s activities/undertakings, and that it relates to services that were actually performed. As for payments for management and administrative expenses incurred by a non-resident affiliate, since they are transactions with related parties, it is also necessary to comply with transfer pricing rules. As such, if expenses correspond to back office services, they probably fall under the definition of low value- added intragroup services, thus being subject to a simplified approach for transfer pricing (5% margin on costs). 5.7 Restraints on Related-Party Borrowing The constraints applicable to related-party borrowing are transfer pricing and thin capitalisation rules, as described in 2.5 Deduction of Interest .
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