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06-08-2010 |
The list of countries and locations deemed to be “tax haven jurisdictions” has been a long debated theme not only at an international level, but also in Brazil. Restrictions against “tax haven jurisdictions” were first introduced in Brazil in 1996 when the concept of a Tax Favourable Jurisdiction was first enacted. Until recently, the countries and locations embraced by this concept were identified in a list. From 1 January 2009, however, a new Law extended the Tax Favourable Jurisdictions criteria and created a new concept called the Privileged Tax Regime. This new regime prompted the Brazilian Revenue Service to issue a new set of regulations. The impact of being placed in a ‘list’ means there will be tax consequences and this has become a discussion point worldwide. Taxand Brazil, Taxand Luxembourg, Taxand Netherlands and Taxand Spain discuss the main impacts, consequences of being on a ‘list’ and areas of concern for multinationals. Definition of a Tax Favourable Jurisdiction versus the Privileged Tax Regime Currently, Tax Favourable Jurisdictions encompass countries or locations: (a) that do not tax income The new Law introduces the definition of the Privileged Tax Regime, including not only countries and locations which qualify under criteria (a) or (b) above, but also those which grant a tax advantage to a non-resident individual or legal entity: i. without requiring substantial economic activity in the respective country or location As a final criterion, countries and locations which do not tax offshore income in particular, or that tax such income at a maximum rate lower than 20%, are also defined as Privileged Tax Regimes. Specific corporate forms and special tax regimes available in some countries, including International Trading Companies in Iceland, Spain ("ETVEs"), US LLCs that are owned by non-US residents and that aren’t subject to federal income tax in the US and “holding companies” in Luxembourg, Denmark and The Netherlands, were listed as Privileged Tax Regimes, although no specific criteria was provided to establish what should be construed as a “holding company”. It came as quite a surprise that Dutch holding companies were included on the list as The Netherlands is not mentioned on a black or grey list by any other country. Dutch holding companies also do not seem to fulfil the Brazilian requirements for “privileged tax regimes”. The Dutch participation exemption is an internationally accepted method of avoiding double taxation. The current rules do not allow the participation exemption to apply to passive investment income. Income from passive tax haven companies will therefore, in principle, be taxed in the Netherlands. The Brazilian authorities may have an issue with specific tax planning structures using Dutch CV’s but these cannot be compared to normal Dutch holding companies. On 23 June 2010 a new Brazilian Revenue Service ruling bound more details around what a “holding company” should be. However the clarifications provided were limited to Denmark and the Netherlands, and didn’t include Luxembourg or Spain. Also, the description of ‘those holding companies which do not carry out actual economic activities’ was not clearly defined, and therefore entities covered by the concept remains vague. The same act gave listed countries’ government representatives the opportunity to call a “request of review” regarding their inclusion in each list. The ‘request of review’ would then be addressed by the Brazilian Revenue Service. Shortly after creating this opportunity, The Netherlands and Switzerland had the effects derived from their inclusion in the lists temporarily suspended. Taxand Netherlands investigated this move by discussing the Brazilian lists with the Dutch Ministry of Finance. Taxand Netherlands learned that the Dutch Ministry had sent a letter to the Brazilian authorities which, in turn, prompted the suspension. No further communications have however occurred between the two countries. It is expected that The Netherlands and Brazil will enter into negotiations for a more favourable tax treaty in the near future. Discussions around Privileged Tax Regimes are likely to form part of the negotiations. At the moment it seems unlikely that Dutch holding companies will reappear on the list, especially with such general wording. The main consequence of a reintroduction to the list will be an additional administrative burden for Dutch companies doing business in Brazil and trading with Brazilian companies. This is especially relevant as The Netherlands is, after the US and Argentina, one of the most important trading partners for Brazil. The Luxembourg authorities may consider sending a request for review to the Brazilian authorities and Taxand Luxembourg is following this closely. The concept of “Luxembourg holding” is currently not defined in the Brazilian tax legislation and it is unclear whether Luxembourg companies with a mainly holding activity are meant (so-called SOPARFIs). Should this be the case, there are definitively some arguments for these companies not to be considered as a privileged tax regime: the Luxembourg holding regime is basically the implementation of the Parent-Subsidiary Directive 90/435/EEC, even though its scope is slightly broader. Luxembourg SOPARFIs are taxed at 28.59% on their income. They benefit from an exemption on dividends and capital gains from EU as well as non EU countries, but only under specific conditions, one of these being that the subsidiaries either qualify for the Parent-Subsidiary Directive or are fully taxable. A similar tax system exists in most European countries. Taxand Spain has been investigating internally if there is any news regarding potential “movements” from the Spanish Tax authorities in connection with the inclusion of the Spanish ETVE in the list but it seems that no official contacts has taken place so far. Notwithstanding the above, Taxand Spain hopes the Spanish tax authorities could imitate their Dutch and Swiss counterparts. We will keep you updated. The tax consequences of defining a Tax Favourable Jurisdiction or Privileged Tax Regime: (a) are required to comply with the transfer pricing rules, regardless of whether the parties are related (b) for purposes of Brazilian thin capitalisation rules, debt entered into by such non-Brazilian entities and Brazilian companies can generally not exceed 30% of the net worth value of the equity interest held in each Brazilian company, rather than the ordinary ratio of debt to equity of 2:1 allowed for these tax purposes. If such limits are not complied with, interest payment connected to the excess debt will not be deductible from the taxable basis of corporate income taxes (there is no change to the withholding income tax levied on the interest, though). (c) certain statutory requirements need to be met for payments by a Brazilian company to such non-Brazilian entities to be deductible from the taxable basis of the corporate income taxes. Conversely, the concept of the Privileged Tax Regime should not be taken into account for a number of other Brazilian tax purposes. For instance, payments of income made to entities in Tax Favourable Jurisdictions (e.g. compensation for services, royalties and interest on loans), and capital gains earned by entities in Tax Favourable Jurisdictions on the sale of investments in Brazilian companies (other than portfolio), are generally subject to the withholding income tax at a higher rate of 25% rather than 15%. If the entity earning such income qualifies under a Privileged Tax Regime, the lower rate of 15% should still apply. In principle, however, treaty rates should prevail over these domestic rates, to the extent that Brazilian tax authorities do not challenge the qualification of the particular item of income. Dividend payments will continue to benefit from exemption of withholding income tax, regardless of where the recipient is resident or domiciled. Taxand’s Take In practical terms, the main concerns for the countries listed as Privileged Tax Regimes might be thin capitalisation rules, which, as a rule, restrict the debt financing to 30% of the net worth value of equity interest held in the Brazilian company, and the compliance with additional statutory requirements for the deduction of interest. Still, dividends paid by a Brazilian company are exempt, which already means an advantage in comparison to debt financings. Besides, the “juros sobre capital próprio” - which is a hybrid remuneration of the capital allowing the deductibility of the interest paid in place of dividends - is not taken into account for purposes of thin capitalisation. Upon fulfilment of particular requirements, certain countries e.g. Luxembourg, The Netherlands and Spain exempt the dividends received from a Brazilian company and capital gains derived from the sale of the participation in Brazilian subsidiaries. Therefore, the overall scenario for investments is not all negative. Those countries which do not agree with being included on the Brazilian lists have the opportunity to provide the Brazilian Revenue Service with a “request of review” and could have the effects of the inclusion suspended, as has happened with the Netherlands and Switzerland. Your Taxand contacts for further queries are: LUXEMBOURG NETHERLANDS SPAIN |
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