A Q&A guide to tax on corporate transactions in Brazil.
The Q&A gives a high level overview of tax in Brazil and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.
To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.
The Q&A is part of the PLC multi-jurisdictional guide to tax on corporate transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.
Brazil has a federal system. The following are authorised to levy taxes within their jurisdictions and in compliance with the applicable constitutional principles (Brazilian Federal Constitution).
The Brazilian Federal Revenue Office (Receita Federal do Brasil) is responsible for enforcing the main taxes on corporate transactions:
Taxes on income, including the corporate income tax (Imposto de Renda da Pessoa Jurídica) (IRPJ) and the social contribution on net profits (Contribuição Social sobre o Lucro Líquido) (CSLL) (see Question 4).
Taxes on revenues, including the contribution for the social integration programme (Contribuição ao Programa de Integração Social) (PIS) and the contribution for the financing of social security (Contribuição para o Financiamento da Seguridade Social) (COFINS) (see Question 4).
Export duties (Imposto de Exportação) (IE) and import duties (Imposto de Importação) (II).
Excise tax (Imposto sobre Produtos Industrializados) (IPI).
Withholding income tax (Imposto de Renda Retido na Fonte) (WHT) (see Question 6).
Contribution of intervention on economic domain (Contribuição de Intervenção no Domínio Econômico) (CIDE) (see Question 6).
Taxes on financial transactions (Imposto sobre Operações Financeiras) (IOF) (see Question 6).
There are 26 states and one federal district in Brazil. State tax authorities are responsible for enforcing the:
State value added tax (VAT) (Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de Transporte Interestadual e Intermunicipal e de Comunicação) (ICMS) (see Question 5).
Tax on donations and on causa mortis transfers (Imposto sobre Transmissão Causa Mortis e Doação de quaisquer Bens ou Direitos) (ITCMD) (see Question 3).
The municipalities are administrative divisions of the states. Currently there are 5,565 municipalities. The municipal tax authorities collect the:
It is not common practice to wait for guidance from the tax authorities before completing a corporate transaction. However, taxpayers can apply to the competent tax authority, under a ruling procedure, for clarification on the interpretation of the tax laws applicable to a particular transaction. The rules and procedures for that procedure will depend on the relevant legislation.
In relation to federal taxes, taxpayers must comply with a number of requirements to obtain a ruling that is binding on the tax authorities (Normative Ruling No. 740, dated 2 May 2007). In particular, the ruling cannot be made on the basis of a theoretical event, but only in relation to an event that has already occurred or that will occur according to a minimum level of certainty.
Key characteristics. The states and the federal district have the authority to impose ITCMD on inheritances and gifts (Federal Constitution). ITCMD is generally charged on the value of goods and rights conveyed by gift or inheritance.
Triggering event. Inheritance tax in Brazil is the tax due on the transfer of ownership of money, shares or real estate from an individual in contemplation of approaching death (causa mortis) to another individual or to a company. This tax is also due on the gift of shares, money and real estate by an individual or a company to another individual or a company.
Liable party/parties. Generally, ITCMD is paid by the recipient of the gift or inheritance.
Applicable rate(s). The different Brazilian states levy different rates. Therefore, it is essential to consider which state the individuals involved with the donation or inheritance are domiciled in. Although there is debate on this issue, the authors consider that the following jurisdictional rules apply:
Conveyance of title to movable property, chattels or money:
in the case of gifts, the state of the donor's domicile;
in the case of inheritance, the state where probate proceedings are being processed.
Conveyance of real property and rights attaching to real property: the state where those assets are located.
Key characteristics. ITBI (a municipal tax) is charged on the transfer of ownership to real property and rights related to real property.
Triggering event. ITBI is charged on the acquisition of real estate and must generally be paid at the registration of the transfer of ownership.
Liable party/parties. Generally, the purchaser must pay the tax.
Applicable rate(s). The tax is charged on the market value of the real estate or right. Each municipality sets the applicable rate, which generally varies from 2% to 6%.
Key characteristics. IRPJ and CSLL are federal taxes charged on the taxable profit of Brazilian companies.
Triggering event. Tax is payable on an annual or quarterly basis depending on the method of calculation (see below).
Liable party/parties. The company receiving the income is the taxpayer.
Applicable rate(s) and methods of calculation. Brazilian companies are subject to the following on their taxable profit:
IRPJ at the rate of 15%, plus an additional rate (surtax) of 10% on any income exceeding BRL240,000 (as at 1 March 2012, US$1 was about BRL1.7) per year (or exceeding BRL20,000, multiplied by the number of months in the tax period).
CSLL at the rate of 9% (apart from certain financial entities, such as banks and insurance companies, that are subject to CSLL at the rate of 15%).
The tax is calculated on either the real profit method or the presumed profit method:
Real profit method: the tax is calculated on an annual or quarterly basis (advance payments may be required) on the adjusted profits before taxes (taxable revenues less deductible expenses). Tax losses incurred in the tax period can be carried forward and offset against taxable income earned in subsequent periods, up to a limit of 30% of the taxable profit of each subsequent period. There is no limit to how long the tax losses can be carried forward.
Presumed profit method: the tax is calculated on a quarterly basis, over a presumed profit margin equivalent to a certain percentage of the revenues (plus other revenues, such as financial revenues and capital gains). This percentage varies depending on the activity developed. For example, revenues derived from providing services are subject to a presumed percentage of 32%, while goods' retailers are subject to a less burdensome 8%.
Generally, the method chosen is at the company's discretion and can change each year. However, the real profit method is mandatory in certain circumstances, such as for companies:
Whose total annual revenues in the prior year exceed BRL48 million.
That are financial institutions.
That earn any income or gain assessed outside Brazil, except in the case of export of services.
Key characteristics. These are social contributions levied on the monthly gross revenues of Brazilian legal entities.
Triggering event. Social contributions are payable on a monthly basis.
Liable party/parties. The legal entity that receives the monthly revenues is liable to pay the tax.
Applicable rate(s) and methods of calculation. These contributions can generally be taxed under either of the following systems:
The non-cumulative system: contributions are generally taxed at the rates of 1.65% (for PIS) and 7.6% (for COFINS). Certain credits can be deducted.
The cumulative system: contributions are generally levied at the rates of 0.65% (for PIS) and 3% (for COFINS). No credits are allowed.
Generally, companies taxed under the real profit method for IRPJ and CSLL must adopt the non-cumulative system. Companies taxed under the presumed profit method must adopt the cumulative system.
Financial entities are subject to a modified cumulative system under which certain deductions are allowed, but the COFINS rate is increased to 4%.
Key characteristics. IPI is a federal tax levied on finished goods (whether foreign or domestic), which are defined as goods resulting from some form of industrial process.
Triggering event. IPI is charged on the shipment of industrialised product (among other tax-triggering events established by the Brazilian National Tax Code (Código Tributário Nacional) (CTN)).
Liable party/parties. The CTN sets out which party is the taxpayer, depending on the tax-triggering event. In the case of the import of industrialised products, the importer is the taxpayer.
Applicable rate(s). Rates vary according to the type of the products. Generally, higher rates are imposed on non-essential products and lower rates on essential products.
Key characteristics. ICMS is a state tax levied on the sale of goods (even where the transaction begins abroad, that is, is an import transaction), on communication services, and on intercity and interstate transportation.
Triggering event. Under the relevant state legislation, ICMS applies to operations related to the circulation of goods (similar to sales tax) and to providing services of interstate and inter-municipal transportation and communication.
Liable party/parties. Each state law has its own particular rules, but the taxpayer is usually the acquiring company and the distributor.
Applicable rate(s). Rates vary according to the nature of the transaction and the relevant state legislation.
Key characteristics. Generally, any income paid, credited, delivered or remitted by a Brazilian source to an individual or legal entity residing abroad is subject to WHT (Articles 682 and 685, RIR/99).
Triggering event. WHT is payable at the moment of payment, credit, delivery, use or remittance of the funds.
Liable party/parties. The taxpayer of the WHT is the foreign beneficiary of the remuneration, although the Brazilian source of payment is responsible for withholding and collecting the tax.
Applicable rate(s). The WHT rate can vary from 15% to 25%, depending on the:
Nature of paid remuneration.
Location of the beneficiary (an increased rate is imposed where the beneficiary is a resident of a country or location that is deemed to be a favourable tax jurisdiction, such as the British Virgin Islands or the Cayman Islands).
Key characteristics. The CIDE was originally created by Law Nº 10,168/00, and previously regulated by Decree Nº 3,949/01 (a regulation that has been revoked by Decree Nº 4,195/02). CIDE is a federal tax charged on any amount paid, credited, delivered, employed or remitted abroad for the:
License of use or acquisition of technological knowledge.
Transfer of technology.
Triggering event. WHT is payable at the moment of payment, credit, delivery, use or remittance of the funds.
Liable party/parties. The taxpayer is the Brazilian party that carries out the relevant payment.
Applicable rate(s). The CIDE rate is 10%.
Key characteristics. ISS is a municipal tax levied on most services, except for those that are subject to ICMS under a federal law that provides general rules for its assessment by municipal authorities (see Question 5, ICMS). General rules for the assessment of ISS by municipal authorities are set out by Supplementary Law No. 116, of 31 July 2003 (Supplementary Law No. 116/03). This law provides a limited list of services that are subject to ISS, which cannot be widened by local legislation.
In addition, ISS may also be charged on services imported from outside Brazil or those that originate from abroad and are concluded inside Brazil (Supplementary Law No. 116/03).
Triggering event. The triggering event for ISS is the provision of a service defined in Supplementary Law No. 116/03, but each municipality has its own rules.
Liable party/parties. The service provider is liable. However, in the case of imported services, the service recipient in Brazil must withhold and collect the tax for the municipality that shelters its establishment.
Applicable rate(s). Generally rates can vary from 2% to 5%, according to the service rendered and the local legislation in force.
Financial transactions relating to currency exchange, loans, securities and insurance are subject to the IOF, a federal tax on financial transactions:
Foreign exchange transactions (Imposto sobre Operações de Câmbio) (IOF/Exchange). Any foreign currency exchange transaction effected in Brazil is subject to IOF/Exchange. The rate of IOF/Exchange is currently assessed at 0.38% for most foreign exchange transactions. However, there are specific rates and exemptions that can apply for certain transactions. The federal government can increase the rate of IOF/Exchange at any time to a maximum of 25%. The taxpayers of IOF/Exchange are buyers or sellers of foreign currency in transactions concerning financial transfers to or from abroad.
Loan transactions (Imposto sobre Operações de Crédito) (IOF/Credit). Generally, loan transactions between corporate entities and between corporate entities and individuals are subject to IOF/Credit. Most transactions are taxed at the rate of 0.0041% per day, if the borrower is a legal entity or individual. In both situations, generally an additional rate of 0.38% is applicable. The executive branch can increase the rate of IOF/Exchange at any time to a maximum of 1.5% per day. The taxpayers of IOF/Credit are the individuals or legal entities that take credit before financial and non-financial entities.
Securities transactions (Imposto sobre Operações envolvendo Títulos ou Valores Mobiliários) (IOF/Securities). IOF/Securities can be imposed on any transaction involving bonds and securities, including derivative transactions. Most transactions are subject to IOF/Securities at the current rate of 0%. Redemption and disposal of fixed yield investments are subject to IOF/Securities at a daily rate of 1%, limited to a percentage of the income assessed, which ranges from 100% to 0%, depending on the term of the transaction. If the term of the transaction is longer than 30 days, the limit is equal to 0%. The executive branch can increase the rate of IOF/Securities at any time to a maximum of 1.5% per day, and 25% in the case of derivative transactions.
The taxpayers of IOF/Securities are either:
the purchasers, in the case of acquisitions of bonds or securities, and the holders of financial investments, in the case of redemption, assignment or repricing; or
the financial institutions and other institutions authorised to operate by the Central Bank of Brazil.
Foreign companies may be subject to the same corporate taxation that applies to Brazilian companies in relation to business activities in Brazil (for example, taxes on corporate income (IRPJ and ISS), and taxes on revenues (PIS and COFINS)).
The general rules are that a foreign company will become subject to Brazilian income taxes at corporate level if the company:
Establishes a branch office or any representation in Brazil.
Sells goods or services under a consignment arrangement where the consignee does not keep adequate records (such a consignment arrangement is only possible with government licensed bonded warehouses).
Enters into an arrangement to make sales through a resident agent that has the authority to bind the company to a contract.
Even if no branch office or representation exists, tax authorities may argue that a de facto branch (that is, non-registered company) exists. Status as a taxpayer does not require that a company be legally registered in Brazil.
The rules concerning tax presence in Brazil and permanent establishment are imprecise, and there are no clear precedents as to exactly when the Brazilian tax authorities will treat a particular situation as a permanent establishment or as an event that implies a taxable presence in Brazil. Each situation will turn on its facts.
Profits distributed as dividends by any legal entity located in Brazil to a Brazilian resident or foreign investors are not subject to taxation in Brazil, provided that those amounts relate to profits generated after 1 January 1996.
As an alternative to the distribution of dividends, a Brazilian company is allowed to make distributions to its shareholders of interest on shareholders' equity, provided that certain conditions and requirements set forth in the applicable law are observed.
From a tax perspective, there are some differences regarding the applicable tax treatment depending on where the beneficiary is located. The payments of interest on shareholders' equity, which are deductible expenses for the company, will be subject to WHT at the rate of:
15%, in the case of a Brazilian resident company beneficiary. This WHT is paid in anticipation and can be offset with the total IRPJ due by the Brazilian resident company.
15%, in the case of a Brazilian resident individual beneficiary. In this case, the WHT is final and cannot be offset with the total individual income tax (Imposto de Renda da Pessoa Física) (IRPF) due.
15%, in the case of non-residents, not located or domiciled in countries or locations that do not tax income, or in those where the maximum income tax rate is lower than 20% (low or nil tax jurisdiction).
25%, in case of non-residents located in a low or nil tax jurisdiction.
The taxes potentially payable on a share acquisition or share disposal are:
These are subject to a privileged tax treatment, including the exemption of IT on capital gains deriving from transaction carried out within the Brazilian stock, future and commodities exchange, including the organised over-the-counter market (Resolution nr. 2,689/00, National Monetary Council).
Foreign exchange transactions related both to the inflow and outflow of funds in Brazil are currently subject to IOF/Exchange at the rate of 0% if they are in connection to:
Investments conducted according to Resolution nr. 2,689/00 in variable income transactions carried out on the Brazilian stock, futures and commodities exchange.
Acquisitions of shares of Brazilian publicly held companies in public offerings or subscription of shares related to capital contributions (provided that the issuing company has registered its shares for trading on the stock exchange).
Because of the complex tax system in Brazil and the sort of taxes that can apply, tax advantages and disadvantages for the buyer can only be analysed on a case-by-case basis. However, in general terms, the main tax advantages and disadvantages for the buyer on a share acquisition are as follows.
There can be the following advantages:
Possible benefit from a tax amortisation of goodwill potentially paid in the case of a merger between the buyer legal entity and the acquired company.
Possible benefit from tax losses and credits registered by the acquired company.
No transfer taxes payable.
There can be the following disadvantages:
The need for tax planning.
Risk of inheriting tax liability.
Because of the complex tax system in Brazil and the sort of taxes that can apply, tax advantages and disadvantages for the seller can only be analysed on a case-by-case basis. However, in general terms, the main tax advantages and disadvantages for the seller on a share sale are as follows.
There can be the following advantages:
Transfer taxes and certain corporate taxes are not payable.
It is possible to restructure the corporation before carrying out the sale to mitigate its tax implications.
The need for tax planning.
Structures adopting holding companies, vehicle companies and investments funds are commonly used in Brazil to minimise the applicable tax burden.
The tax authorities may challenge tax-driven structures on the basis that the structure lacks economic substance and has no real business purpose.
The taxes potentially payable on an asset disposal are:
IRPJ, CSLL, PIS and COFINS if the assets are sold by Brazilian legal entities (see Question 4).
IRPF at a 15% rate if the assets are sold by a Brazilian resident individual (see Question 8).
IT at rates ranging from 15% to 25% and IOF/Exchange, if the assets are sold by Brazilian non-residents (see Question 6).
ITBI in case of real estate transfers (see Question 3).
There are certain exemptions and reliefs, for example:
Brazilian-resident individuals benefit from certain tax exemptions in connection with the disposal of real estate units.
The disposal of fixed assets by Brazilian legal entities is currently exempt from PIS and COFINS (see Question 4).
Tax advantages and disadvantages for the buyer can only be analysed on a case-by-case basis. However, in general terms, the main tax advantages and disadvantages for the buyer of an asset acquisition are as follows.
The buyer can:
Mitigate the potential risk of inheriting tax liability.
Benefit from potential tax amortisation and depreciation of the asset cost.
Is liable to pay transfer taxes.
Cannot use tax credits related to the acquired assets.
Tax advantages and disadvantages for the seller can only be analysed on a case-by-case basis. However, in general terms, the main tax advantages and disadvantages for the seller of an asset sale are as follows.
The seller retains tax losses and tax credits.
The seller is liable to transfer taxes and certain corporate taxes.
See Question 13.
A merger between two legal entities results in the termination of the current period used to calculate the tax bases of corporate taxes of the merged company (that is, IRPJ and CSLL). Therefore, this requires that the resulting legal entity will need to file tax returns at an early stage.
In addition, an absorbing legal entity remains liable for all the tax obligations of a dissolved legal entity that exist at the time of the merger (CTN). The tax treatment of the transfer of assets within a merger depends on the:
Nature of the assets.
Conditions of the merger.
The transfer of assets in a merger can be perfected at book or market value and the tax consequences may vary accordingly.
Brazilian tax rules set out certain exemptions and reliefs. For example, real estate transfers resulting from merger, spin-off or extinguishment of a company are not subject to ITBI, provided that the purchaser's core-business is not related in any way to the sale and purchase or lease of real estate and connected rights (see Question 3).
See Question 13.
The following taxes are potentially payable on establishing a joint venture company:
Brazilian tax rules set forth certain exemptions and reliefs. For example, real estate transfers resulting from contribution of real estate units into a JVC are not subject to ITBI, as long as the JVC's core business is not related in any way to the sale and purchase or lease of real estate and connected rights.
See Question 13.
The following are the main taxes that may apply on a company reorganisation:
Therefore, corporate reorganisations must be carefully analysed from a tax perspective.
Brazilian tax rules set out certain exemptions and reliefs, for example, transfers of assets and shares that are at book value are generally not subject to corporate taxation (see Question 4).
See Question 13.
Generally, the key tax matters to be considered in the context of restructuring procedures are potential tax succession, especially in connection with corporate taxes (IPRJ, CSLL, PIS and COFINS) and capital gains on the sale of assets or the acquisition of credits with discounts. Current legislation allows restructuring without succession in certain circumstances, and certain structures may avoid the risk of capital gains.
Brazilian tax rules do not provide specific tax treatment for buyback transactions. Therefore, buyback transactions are subject to the same tax treatment that applies to capital gains on share acquisitions and disposals (see Question 9).
The same exemptions and reliefs that apply to shares acquisitions and disposals apply to buyback transactions (see Question 10).
See Question 13.
Brazilian tax rules do not provide specific tax treatment for MBOs. Therefore, the same tax treatment applies which applies to capital gains on share acquisitions and disposals (see Question 9).
The same exemptions and reliefs that apply to share acquisitions and disposals apply to buyback transactions (see Question 10).
See Question 13.
The Brazilian government regularly implements changes to tax regimes and rules. These changes include:
Modifications to the rate of assessments.
Occasionally the enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes.
There are several tax reform proposals being discussed in the Congress, which mainly cover the following points:
Simplification of tax assessments.
Avoidance of internal disputes within and between the Brazilian states and municipalities.
Redistribution of tax revenues.
The tax reform proposal provided for changes in the rules governing PIS, COFINS, ICMS and some other taxes. The exact effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms cannot yet be quantified, as they are still being discussed within the Brazilian Congress.
Qualified. Brazil, 1999
Areas of practice. Taxation; corporations and individuals; tax planning; taxation on M&A transactions; cross-border transactions; corporate reorganisations; wealth and succession planning.
Recent transactions. Has represented CBD, Camargo Correa, Qualicorp, Iguatemi, Noble, Magazine Luiza.
Qualified. Brazil, 2001
Areas of practice. Taxation; corporate; financial and capital markets transactions.
Recent transactions. Has represented BM&FBOVESPA, Santander, Citibank, CETIP, OGX, Bradesco, Accenture.
Qualified. Brazil, 1991
Areas of practice. Taxation; litigation on judicial and administrative courts.
Recent transactions. Has represented Praxair, Light, Embratel, Neoenergia, Banco Cruzeiro do Sul.