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The First Income Tax Return for Expatriates Residing in Brazil

By David Roberto R. Soares da Silva

As of today (March 1, 2021), Brazilian resident individuals have to report their taxes to the Federal Revenue Department by filing their annual tax returns. The deadline for the filing is April 30, 2021, and it applies to expatriates residing in Brazil in 2020.

Expatriates coming to work in Brazil must take some precautions when preparing their first Brazilian annual income tax return. Some mistakes and errors made in the first tax return may cause unnecessary and undesirable effects in the future.

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Exposure of foreigners to Brazilian succession laws, probate, and taxes

By David Roberto R. Soares da Silva

Foreign individuals with property in Brazil may be subject to local succession laws and probate if they hold property in their name or are married to a Brazilian spouse or have Brazilian children.

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Compliance in Brazil: Internal Investigations and Disciplinary Measures

By Edmo Colnaghi Neves

Once the complaints have been received through the appropriate channel or even once the company becomes aware of potential violations by other means, it is time to conduct internal investigations to ascertain whether there are grounds for such complaints. If so, the organization has to take action according to the legislation and its internal rules.

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Compliance in Brazil: Reporting Channels

By Edmo Colnaghi Neves

Compliance activities are not limited to preventive measures. Responsive and investigative efforts are also part of the compliance framework. These activities aim to identify violations of the Law, internal rules, and ethical principles. After all, despite all the guidance and standardization of a compliance program, there are always those who insist on incurring violations. An organization must investigate these violations and apply disciplinary measures, as appropriate.

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Compliance in Brazil: Communication

By Edmo Colnaghi Neves

Today we deal with another essential element for a successful Compliance and Integrity Program: Communication. It is a concept that is of the utmost importance for the implementation, development, and maintenance of any compliance program in Brazil.

Communication is, of course, also critical for Risk Management and Corporate Governance.

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Compliance in Brazil: The Code of Conduct

By Edmo Colnaghi Neves

The Code of Conduct is essential to any company’s Compliance and Integrity Program. After creating a “tone at the top” atmosphere – which requires full leadership commitment – and conducting all necessary risk assessments, it’s time to draft the Code of Conduct, considering the probability of the risks and their potential impact on the company.

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Private Letter Rulings and Taxation of Cost-Sharing Agreements in Brazil

By Roberto P. Vasconcellos

Cost-sharing agreements are not about service rendering. The former only purpose is to allocate costs to legal entities within a corporate group. There is no rendering of services within the corporate group. For this reason, the reimbursement of costs should not be taxable. In Brazil, cost-sharing agreements are not regulated by law, but interestingly, a growing number of private letter rulings shape how Brazilian taxation should apply.  

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Brazil Considers Extraordinary Tax on Large Corporation Profits

By Priscila Lucenti Estevam

Using the Covid-19 pandemic as a justification, a law project under review in Brazil’s House of Representatives proposes the creation of an extraordinary tax on the past profit of large companies.

At the end of March, lawmaker Wellington Ribeiro submitted Complementary Law Project (PLP) No. 34/2020 to the House of Representatives, which proposes the creation of an extraordinary tax (so-called “compulsory loan”) to meet urgent expenses resulting from the situation of public calamity due to COVID-19.

A compulsory loan is a “refundable” tax that the Union can only create through a complementary law approved by absolute majority votes both in the House of Representative (257 votes) and the Senate (41 votes), in cases of:

  1. external war or imminence of war,
  2. a public calamity that requires federal aid that is impossible to meet with available budgetary resources, or
  3. a situation that requires a temporary absorption of purchasing power.

The justification for PLP No. 34/2020 is precisely the public calamity resulting from the Covid-19 crisis, whose health expenses could not typically be met with budgetary resources.

On other occasions, when a compulsory loan was created (on car and fuel sales and electricity bills), the amounts paid by taxpayers have not been fully refunded, generating endless court disputes.

The PLP in question proposes that companies domiciled in Brazil with net equity of BRL 1 billion or more, according to their last balance sheet, will be subject to a compulsory loan of up to 10 percent of their net income of the previous twelve months before the publication of the law. It proposes that tax rates shall vary according to business sectors and that the Ministry of Economy shall establish the rates within 15 days from the date of publication of the law. The deadline for payment of the compulsory loan shall be within 30 days as from the publication of the law.

Where the amount payable is higher than BRL 1 million, payment can be made in up to three monthly and successive installments. Payment after the due date shall trigger the accrual of interest and a penalty between 10 and 30 percent of the amount due, depending on the delay time. The penalty shall be 10 percent if the payment is made within the same month of the due date, 20 percent when made in the month following the due date, and 30 percent if made after the second month following the due date.

If the PLP is approved, the amounts received by the government as a compulsory loan shall be refunded to taxpayers within four years, counting from the end of the Covid-19 calamity situation in up to 12 monthly installments adjusted monthly by the SELIC interest rate. If any amount collected is not spent, the refund shall occur proportionally to the amounts collected within 60 days as from the end of the public calamity situation.

The constitutionality of the PLC is questionable. By intending to tax net income of the 12 months before the publication of the law, the project might violate the non-retroactivity principle contemplated in Article 150, item III(a) of the Federal Constitution. The non-retroactivity principle, or the ex-post-facto rule, means that the tax law cannot retroact in time to impose taxes on taxable events that occurred before the law has entered into force. This principle aims at guaranteeing that taxpayers will not be surprised by a tax law that affects past transactions. Additionally, taxation of past economic performance may represent an offense to another constitutional principle, that is, the tax capacity principle of Article 145 § 1 of the Constitution. In practice, it means that those who can pay more should pay more. Still, in the case at hand, the criterion of past net income might violate the tax capacity principle because the net equity of 2019, in most cases, no longer reflects the current scenario in 2020 amidst the pandemic.

Priscila Lucenti Estevam, senior tax associate of Battella, Lasmar & Silva Advogados and co-author of  Planejamento Patrimonial: Família, Sucessão e Impostos and Tributação da Economia Digital no Brasil, published by Editora B18.

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Perspectives on the Possible Dividend Taxation in Brazil

By David Roberto R. Soares da Silva and Roberto P. Vasconcellos

Reforming the Brazilian tax system seems to be a need recognized by tax professionals, entrepreneurs, executives, and all government levels. The recognition of this need has been further reinforced by the global pandemic that hit Brazil, which, simultaneously, caused a considerable increase in public spending and increased the need to raise the revenue by taxation.

The World Bank’s annual report (Doing business 2020) places Brazil in the shameful 124th place in the ranking regarding business regulation in 190 countries. According to the World Bank, it takes about 1,504 hours a year to comply with tax obligations in Brazil. Interestingly, this number is much higher than that of countries with an even more complex reporting/compliance system than Brazil, such as the United States. In the latter, approximately 175 hours are required annually for tax compliance.

However, unfortunately, the consensus on the need for Brazilian tax reform does not go beyond the mere premise of this need.

For almost 25 consecutive years, Brazilian companies have been accustomed to distributing their profits without any taxation based on Article 10 of Law 9,249/1995. The lack of taxation of members and shareholders of legal entities in Brazil leads many to believe that this is an unjust privilege in a country with very high social inequality. However, the tax exemption on dividends cannot be seen separately from the context of the taxation of the legal entity that determines its distribution.

The corporate income taxation in Brazil is made with four different taxes: corporate income tax itself (IRPJ), social contribution on net income (CSL), and two contributions on monthly gross revenues (P.I.S. and COFINS. Their combined rates reach 43.25%, for companies under the “actual profit” income tax calculation regime.
In other words, merely making dividends taxable in Brazil would only increase the already heavy tax burden on legal entities, possibly expanding the number of insolvent companies, making it even more challenging to generate jobs and, inevitably, increasing tax evasion in the country.

On the other hand, the tax exemption on dividend distributions does not need to be unconditional. For instance, it could apply to distributions to operating companies, enabling the recipient company to reinvest the money into productive business activities. It could also be conditioning it to a certain percentage of equity interest or how long the investor holds the investment, measures that some countries have already adopted. But more substantial studies must precede the feasibility of any of these options in the Brazilian context.

A law project in Congress (Law Project No. 1952/2019) proposes the end of the deduction of interest on equity, reduces the basic corporate income tax rate from 15% to 12.5% and corporate surcharge rate from 10% to 7.5%. The law project also reintroduces taxation on dividend distributions at 15% to all companies, including small businesses under the Simplified Tax Regime.

It is possible that, for the time being, legislators end up choosing dividend taxation as an easy and practical alternative compared to a more profound tax reform that makes the country’s tax system simpler and more taxpayer-friendly. Tax reform would require a lot of compromise from all government levels, but the current pandemic crisis does not favor such a debate, despite some scarce and uncoordinated initiatives by some Congress members.

Due to constitutional limitations, if passed into law in 2020, the new taxation on dividends can only apply as of January 1, 2021. The question remains whether the new tax could reach profits generated before its enactments even if distributed thereafter.

David Roberto R. Soares da Silva and Roberto P. Vasconcellos are founding partner and senior tax associate of do Battella, Lasmar & Silva Advogados, in São Paulo.