Brazil's Tax and Trade Policies under the Rousseff - Brazil-US ...

Brazil - U.S. Business CouncilBrazil’s Tax and Trade Policies under the RousseffAdministrationGlaucia Lauletta Frascino and Alessandro Amadeu da FonsecaWashington, September, 2012

General Rules of Foreign Investments• Foreign investments are subject to registration before Central Bank of Brazil (“BACEN”),whether in the form of equity or debt•Exchange controls: Brazil has a system of exchange control in regard to the remittances offunds abroad, including capital injection, remittance of dividends, interest payments, funds fromimport and export operations, remittance of royalties and contracting services. This control isdone by BACEN.• Repatriation: there is no minimum period for being in Brazil (there may be specific tax for loanswith term of less than 90 days). The return of invested capital as a divestiture or dividends is freeand exempt of taxes. Capital gains are taxed. Remittance of interest are subject to WithholdingIncome Tax and their remittance abroad also depends, in general, to previous registration beforeBACEN.

Limitations to Foreign Investment• Communication industry / media: newspapers and media companies (image and sound)must be controlled by Brazilian individual ; foreign investment is limited to 30% of the totalvoting capital, this rule does not apply to Internet companies• Petroleum and nuclear energy: state monopoly, but the Government may authorize theexploration by state enterprises, mixed-capital or private companies• Health: restricted to national capital (although foreigners can participate in health insurancecompanies)• Mining: participation of foreign capital through Brazilian companies is allowed. There aremore restrictions in border areas• Buildings: there are restrictions only in border areas (including coastal zone), whileBrazilian companies with foreign capital may have properties in the coastal zone• Public Services: telecommunications, electricity, gas distribution, rail transport, amongothers, are explored through concessions and foreign participation is permitted undercertain restrictions

Establishing a company in Brazil• Due to the difficulties of operating in Brazil through branches, the common way of doingbusiness in Brazil is through a Brazilian company• Types of companies used: (a) limited partnership or (b) a corporation (which can access thecapital markets through the issuance of shares and debentures). In both cases, the partners'liability is limited to the capital invested or committed to be invested• However, there may be liabilities for tax or labor issues (except for strict liability of thecontrollers of financial institutions)• In general, administrators are personally liable only if they acted in violation of law or thecorporate bylaws. There are, however, specific hypotheses of managers liability for issuessuch as violation of consumer rights or environmental and tax laws

Establishing a company in Brazil• To establish a company in Brazil is necessary:• Select at least two partners, both can be foreigners;• Select an address - some companies lease addresses to pre-operating companies;• Select an officer: (i) one officer for the limited; (ii) for corporations, there must be two officers; (iii)in both cases, officers must be resident in Brazil;• Register the article of association/ corporate bylaws on the commercial registry of the State of thecompany's headquarters;• Incorporating a company in Brazil lasts approximately 20 days after received notorized andlegalized foreign documents. Operating license may take more time depending on the activity;• Register before BACEN of the capital remitted to Brazil as equity or debt.

Associations / Joint Ventures• Joint ventures ("JV") are created in Brazil through the incorporation or acquisition of a localcompany, where partners negotiate a shareholders agreement, defining mutual rights andobligations• Typically, JVs are Limited Partnerships or Corporations• It must be provided:• The division of powers between the partners (who chooses the board members and directorsand quorum determination of certain matters)• Withdrawal ("lock-up", "tag-along" and "drag along")• "dead-locks" solutions ("options", "shot-gun")• Non-competition clause and change of control• Solution dispute clause• Applicable law: may be foreign• Jurisdiction: arbitration or judicial

Acquisition of Equity Interest• Acquisition of the share control or minoritary interest in a Brazilian company - basicdocuments: Confidentiality agreement Letter of intent or memorandum of understanding "Due diligence" contingencies and compensation (damages) Definitive Agreements: typically, the subscription or purchase agreements, and in case ofbuying less than 100%, shareholders' agreement. Regulatory approvals, when applicable (telecommunications, financial institutions, health, etc.) Previous communication to the competition authorities (Conselho Administrativo de DefesaEconomica - “CADE”) in case of the total revenues of the invested company is superior to R$ 30million or the total revenues of the investor company is superior to R$ 400 million

Brazilian Corporate TaxationTaxation on Profits: Corporate Income Tax (“IRPJ”) and Social Contribution on net Profits(“CSLL”)• Brazilian companies are subject to IRPJ, at the rate of 15% plus an additional rate of10% on any income exceeding R$ 240,000¹ on an annual basis or R$ 20,000 on amonthly basis, and CSLL, at the rate of 9%• Both IRPJ and CSLL are levied on the company’s profits, calculated in accordancewith: (i) the Real Profit Method (“RPM”) or (ii) the Presumed Profit Method (“PPM”)• The election of RPM or PPM is, as a rule, discretionary to the taxpayer. However,under Brazilian tax legislation, the RPM is mandatory for companies: (i) whose totalannual revenue in the prior year exceeded R$ 48,000,000, (ii) that generate income orgains abroad, (iii) which are financial institutions, (iv) which are factoring companies, or(v) which are entitled to specific tax incentives and exemptions• Please note that there is no specific rule for newly-incorporated companies in regard ofthe first requirement. In our understanding, once the requirements above are observed,the newly formed company may adopt whichever method that might bring tax efficiencyfor the business

Brazilian Corporate TaxationReal Profit• Under the Real Profit, the amount of IRPJ and CSLL is calculated on an annual orquarterly basis on net profits before taxes, adjusted by additions (taxable revenues)and exclusions (deductible expenses) authorized by the applicable tax legislation• Tax losses may be carried forward with no time limitation but they may be used toreduce up to 30% of the taxable profit generated in a given yearPresumed Profit• Under the PPM, the amount of IRPJ and CSLL is calculated on a quarterly basis, overa profit margin calculated through the application of a certain percentage on the grossrevenue of the legal entity (the “presumed profit” margin)• Unlike the Real Profit, the Presumed Profit does not allow any kind of deduction andtax loss carry forward

Brazilian Corporate TaxationTaxation on Revenues: PIS and COFINS• PIS and COFINS are levied on a monthly basis on the companies’ revenues calculated inaccordance with(i) a cumulative system at the rates of 0.65% (PIS) and 3% (regular rate of COFINS) or(ii) a non-cumulative system, at the rates of 1.65% (PIS) and 7.6% (COFINS), but thecompany is entitled to use PIS and COFINS credits with respect to certain costs andexpenses authorized by law• Companies adopting Real Profit are subject to PIS and COFINS under the non-cumulativesystem whereas companies under the Presumed Profit are subject to PIS and COFINS underthe cumulative system• Revenues resulting from the sale of permanent assets are exempt from PIS and COFINS.Financial revenues generated by companies under the non-cumulative system are subject toa rate of zero, except for interest on net equity (juros sobre capital próprio)

Taxes on Company’s DistributionsDividends• The profits distributed as dividends, by Brazilian resident legal entities to beneficiaries thatare resident in Brazil (corporations or individuals) or abroad, are currently not subject towithholding income tax in BrazilInterest on Net Equity (“INE”)• Brazilian legislation permits a Brazilian corporation to make distributions to shareholdersas INE and treats those payments as a tax deductible, if some requirements are met• For purposes of tax deduction, the payments of INE are limited to the daily pro ratavariation of the long term interest rate (TJLP), as determined by the Central Bank fromtime to time, over the net equity of the company• Also, for purposes of tax deductibility, the amount to be paid may not exceed the greaterof50% of net income (after CSLL but before taking into account IRPJ and theamounts of INE itself) related to the period in which the payment is made and50% of the sum of retained profits and profit reserves as of, as rule, the beginningof the calendar year in which the payment is made

Taxes on Company’s Distributions• INE (continuation)• Payment of INE whether to a Brazilian resident or to a beneficiary located abroad issubject to withholding income tax in Brazil at the rate of 15%• If the beneficiary of the INE is located in a country or location that does not imposeincome tax or where the maximum income tax rate is lower than 20% or yet whereinternal legislation imposes restrictions on the disclosure of shareholdingcomposition or investment ownership (“Favorable Tax Jurisdiction”), the withholdingincome tax rate is increased to 25%

Other Brazilian Tax Considerations1. Capital Gains• As a rule, capital gains realized by non-Brazilian residents upon the disposal of assetsare subject to income tax in Brazil at the rate of 15%, whether the disposal is made toa Brazilian resident or to another non-Brazilian resident• The applicable rate is increased to 25% if the non-Brazilian resident is located in aFavorable Tax Jurisdiction2. Income• As a rule, any income paid, credited, delivered, employed or remitted by a Braziliansource to an individual or legal entity residing abroad is subject to withholding incometax and, depending on the nature of the transaction that generates said income, othertaxes may be applied (such as PIS and COFINS, Tax on Services – ISS andContribution for Economic Domain Intervention – CIDE)

Other Brazilian Tax Considerations3. Foreign exchange transaction• The conversion of Brazilian reais into foreign currency and the conversion of foreigncurrency into Brazilian reais, may both be subject to the Tax on Foreign ExchangeTransaction (“IOF/Exchange”). Although for most foreign exchange transactions, therate of IOF/Exchange is 0.38%, it may be increased, at any time, up to 25% (applicableonly for future transactions)

Other TaxesOther Federal Taxes• IPI: levied on finished goods (national and foreign finished goods)• II: levied on the importation of goods and collected at customs clearance• IOF: levied on financial transactions relating to currency exchange, loans, securities andinsurance (IOF/Exchange, IOF/Credit and IOF/Securities)• CIDE: levied at a rate of 10% on any monthly amount paid, credit, delivered, utilized orremitted abroad, regarding license of use of technological knowledge and transfer oftechnology• INSS Social Security tax: levied on payroll and on remuneration to be paid, respectively,by employers and workers• PIS/COFINS-Import: generally levied on the entrance of foreign goods in the Brazilianterritory on importation of services. Such contributions are due at the combined rate of9.25%. In certain cases, PIS-Import and COFINS-Import can generate credits in line withthe non-cumulative system of PIS and COFINS

Other TaxesState TaxesICMS VAT Tax: levied on sales of goods; inter-municipal and inter-state transportationservices; and communication services• IPVA: levied on the property of vehicles• ITCMD: levied on the value of goods and rights conveyed by donation (as a gift tax) orestate succession (as a death tax), at a rate to be determined by each Brazilian stateMunicipal Taxes• ISS: levied on general services, which are not subject to ICMS taxation• IPTU: in general terms, it is levied in respect of the ownership, control or possession ofurban land or buildings, based on the market value of such real estate• ITBI: levied on the sale, purchase or assignment of real estate or of rights related

Tax Incentives• REIDI – Special Regime with Incentives for Development of Infrastructure in Brazil(Transportation, port, energy, basic sanitation and irrigation )• REPORTO – Tax Regime with Incentives for Modernizing and Amplifying the PortStructure (Port)• Special Regime for Exporting and Importing Goods for Exploitation Researches of Oil andGas Oil and Natural Gas (goods for exploitation researches)• REPENEC – Special Regime of Incentives for Development of Infrastructure in the OilIndustry located in North, Midwest and Northeast Regions (oil - regional infrastructure)• REPEX – Special Regime for Importing Crude Oil and Oil Products (Oil – Import)• RETAERO – Special Regime for Brazilian Aeronautical (Aeronautical Industry)• RECOM – Special Regime for Building, Amplifying, Reforming or Modernizing SoccerFields (FIFA World Cup 2014)

For further information:Glaucia Lauletta FrascinoAlessandro Amadeu da Fonsecaglaucia@mattosfilho.com.brafonseca@mattosfilho.com.br55 11 3147-7692 55 11 3147-2812São PauloAl. Joaquim Eugênio de Lima 44701403 001 São Paulo SP BrasilTel (55 11) 3147 7600Fax (55 11) 3147 7770BrasíliaSHS Q.6 Bloco C Cj A sala 190170322 915 Brasília DF BrasilTel (55 61) 3218 6000Fax (55 61) 3218 6090Rio de JaneiroAv. Presidente Wilson 231 Cj 403/40420030 021 Rio de Janeiro RJ BrasilTel (55 21) 3231 8200Fax (55 21) 2262 6675New York135 East 57th Street 12th FloorNew York, NY, USA 10022Tel (1 646) 695 1100Fax (1 646) 695 1110Rua Campo Verde 61 3ºandar01456 010 São Paulo SP BrasilTel (55 11) 3035 4050Fax (55 11) 3035 4067www.mattosfilho.com.br