KNOWLEDGE BASE

INTERNATIONAL INVESTMENT

Investing in South America: Brazil

Overview Tax Treaties Salient Features Case Studies

OVERVIEW

Dividends paid by Brazilian companies on profits generated after 1st January 1996 are not subject to withholding tax. The law requires an annual payment of dividends with reference to the minimum portion established in the articles of incorporation, considering the minimum limit of 25% of the net profit of the year.

There are no limitations on payment of interest to foreign lenders, related or not, on the extent that the contact is made under market conditions. Such interest is fully deductible without limitation.

Royalty payments are authorised only after the underlying intangible is registered in both countries. Deductibility of royalties and fees is limited up to 5% of the net receipts from the product manufactured or sold. Royalties paid are subject to a 15% withholding tax.

Payments of any kind made to tax havens are subject to withholding tax at a rate of 25%.

Investment made by non-residents in Brazil may become interesting provided that that there is no withholding tax applicable to payment of dividends. It is important to note that if such payment is made to tax havens the withholding tax at the highest rate of 25% will be applicable. This rate applies to any payment made to low-tax jurisdictions. However, using the extensive network of Brazilian tax treaties it is still possible to reduce substantially this tax rate.

Capitalisation of a Brazilian company through shareholders’ loan may also have some tax advantages. As it is mentioned above, there is no limitation for the amount of loans and interest paid. The latter is completely deductible.

In addition, Brazil applies same withholding tax whether to treaty or non-treaty countries (exception for Japan). However, using some double tax treaties signed by Brazil one can avoid possible income taxation in the recipient’s hands.

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TAX TREATIES

Brazil has concluded double tax treaties with the following countries:

Dividends% Interest% Royalties%
Argentina 0 15 (c) 15
Austria 0 15 (c) 15 (b)
Belgium 0 15 (a) (c) 15 (b)
Canada 0 15 (a) (c) 15
Chile (K) 0 15 15
China 0 15 (c) 15
Czechoslovakia (g) 0 15 (c) (e) 15
Denmark 0 15 (c) 15
Ecuador 0 15 (c) 15
Finland 0 15 (c) 15 (b)
France 0 15 (a) (c) 15 (b)
Germany 0 15 (a) (c) 15
Hungary 0 15 (c) (f) 15
India 0 15 (c) 15
Israel (i) 0 15 (c) 15 (h)
Italy 0 15 (c) 15
Japan 0 12,5 (c) 12,5 (d)
Korea 0 15 15
Luxembourg 0 15 (a) (c) 15
Netherlands 0 15 (a) (c) 15
Norway 0 15 (c) 15
Paraguay (i) 0 15 (c) 15
Philippines 0 15 (c) 15
Portugal 0 15 (c) 15
Spain 0 15 (c) (e) 15 (b)
Sweden 0 15 (c) 15
Ukraine (i) 0 15 (c) 15
Non Treaty Countries 0 15 15

(a) The withholding rate is 10% for interest on certain bank loans with a minimum term of seven years.

(b) The withholding rate is 10% for royalties for copyrights of literary, artistic or scientific works, or for films or videotapes for televisions or radio broadcasting produced by a resident of a contracting state.

(c) Interest paid to the government of the other contracting state, a political sub-division thereof or any agency (including a financial institution) wholly owned by that government or political subdivision thereof is exempt from tax.

(d) The withholding rate is 15% for royalties arising from copyrights of cinematographic films and films or tapes for radio or television broadcasting.

(e) The withholding rate is 10% for interest on certain long-term (at least 10 years) bank loans.

(f) The withholding rate is 10% for interest on certain long-term (at least eight years) bank loans.

(g) Brazil is honouring the Czechoslavakia treaty with respect to the Czech and Slovak Republics.

(h) This rate applies to royalties related to the use, or the right to use, trademarks. For other royalties, the rate is 10%.

(i) This treaty has been signed, but it has not yet been ratified.

(j) The tax treaties do not apply to the CIDE.

(k) This treaty is effective from 3 October 2003.

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SALIENT FEATURES

Corporate Income Tax The actual income tax rate is 15%. A 10% surtax applies to profit exceeding R$ 240,000 ($US 84,000).
Dividends Dividends paid out of earned income are not subject to withholding tax.
Interest Interest for most forms of loan facilities is generally deductible for Brazilian tax purposes. Interest payments to non residents are generally subject to withholding tax at the rate of 15% (25% if paid to blacklisted tax haven jurisdictions).
Royalties Same as interest payments, royalties are taxed at the rate of 15%.
Loss Relief Losses may be carried forward indefinitely but may be offset only against up to 30% of the taxable income of each period.
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CASE STUDIES

Offshore Investing into Brazil
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