Corporate tax in Brazil

Summary

Corporate Income Tax Rate (%) 15 (a)
Capital Gains Tax Rate (%) 15 to 30 (a) (b)
Branch Tax Rate (%) 15 (a)
Withholding tax (%)
Dividends 0
Interest 15 (c) (d)
Royalties from Patents, Know-how, etc. 15 (c) (d) (e)
Services 15 (c) (d) (e) (f)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited (g)

a) A 10% surtax is also levied (see Section B).

b) Under Law 13,259/16, which was published in March 2016 and resulted from the conversion of Provisional Measure (PM) 692 of September 2015, the capital gains tax rate for Brazilian individuals is increased from a 15% flat rate to a progressive rate system with rates ranging from 15% to 22.5%. Although the Brazilian tax authorities have not yet provided any guidance, this increase would potentially also apply to capital gains realized by nonresi­dent companies and individuals because they are generally subject to the same taxation as the taxation applicable to Brazilian individuals. The effective date established by Law 13,259 is 1 January 2016, as stated in PM 692. How ever, as a result of constitutional issues, the increase should not apply until 1 Jan­uary 2017. The Brazilian Revenue Service has indicated that it will not seek to apply the new rates before 2017, but a formal regulation has not yet been issued in this regard.

c) The withholding tax is imposed on payments, credits, deliveries or remit­tances abroad, and on the use of amounts in Brazil for the benefit of non­residents.

d) The withholding tax rate may increase to 25% if the recipient is resident in a black-listed jurisdiction, which means a jurisdiction that taxes income at a rate lower than 20% (or 17% if the jurisdiction or regime complies with the inter­national standards of tax transparency).

e) A 10% Contribution for Intervention in the Economic Domain (Contribuição de Intervenção no Domínio Econômico, or CIDE) is imposed on royalties and on technical and administrative service payments.

f) The withholding tax rate may increase to 25%, depending on the type of ser­vice rendered.

g) For details, see Section C.

Taxes on corporate income and gains

Corporate income tax. Brazilian resident companies are subject to corporate income tax (CIT) on their worldwide income. Compa­nies resident in Brazil are those incorporated under the Brazilian laws and managed in Brazil.

Foreign branches, agencies or representative offices of Brazilian companies are also subject to Brazilian tax on their income earned overseas. In general, foreign-source losses may not offset Brazilian-source income. A foreign tax credit is available (see Foreign tax relief).

In addition to CIT, Social Contribution Tax (SCT) is imposed on worldwide income (see Rates of tax).

Rates of tax

Corporate income tax. The basic rate of CIT is 15%, increas ed by a surtax of 10% on annual taxable profits exceeding BRL240,000 (approximately USD63,150).

Exemption from, or reduction of, CIT is granted to businesses in certain underdeveloped areas.

Social Contribution Tax. SCT is levied at a general rate of 9%. For financial institutions, private insurance companies and capitaliza­tion companies, the SCT rate is 20% until 2018, while for credit unions, the SCT rate is 17% until 2018.

SCT is not deductible in calculating CIT. The tax bases for SCT and CIT are basically the same. The total effective tax rate on corporate profits is 34% (25% CIT [including the 10% surtax] plus 9% SCT).

Losses for SCT purposes are subject to the same tax rules appli­cable to losses for CIT purposes.

Capital gains. Capital gains are treated as ordinary income and, accordingly, are subject to CIT and SCT. Until September 2015, capital gains derived by nonresidents on shares were subject to capital gains tax at a rate of 15%. A 25% rate applied to nonresi­dents located in low-tax jurisdictions.

Under Law 13,259/16, which was published in March 2016 and resulted from the conversion of Provisional Measure (PM) 692 of September 2015, the capital gains tax rate for Brazilian individu­als is increased from a 15% flat rate to a progressive rate system with rates ranging from 15% to 22.5%. Although the Brazilian tax authorities have not yet provided any guidance, this increase would potentially also apply to capital gains realized by nonresi­dent companies and individuals because they are generally sub­ject to the same taxation as the taxation applicable to Brazilian individuals. The effective date established by Law 13,259 is 1 Jan­uary 2016, as stated in PM 692. However, as a result of constitu­tional issues, the increase should not apply until 1 January 2017. The Brazilian Revenue Service has indicated that it will not seek to apply the new rates before 2017, but a formal regulation has not yet been issued in this regard.

Administration

Filing and payment. The fiscal year is the calendar year. In gen­eral, companies must file returns in an electronic format by the last working day of June of the following year. Extensions to file returns are generally not available.

Effective from the 2014 calendar year, income tax returns were replaced by a new electronic filing called Escrituração Contábil-Fiscal (ECF), which must be submitted to by the end of June of the following calendar year.

Companies may elect to pay CIT and SCT on an annual or quar­terly basis. In general, this election may not be changed during the calendar year. Companies that elect the annual basis must make advance monthly payments of CIT and SCT. The advance pay­ments are equal to the income tax applicable to either the com-pany’s actual taxable income or the company’s income calculated in accordance with an estimated method, whichever is lower.

For monthly payments of CIT that are calculated based on the estimated method, the tax base is generally 8% of the company’s gross income. Different percentages apply to specific industries, such as the following:

  • 16% for financial institutions and transportation services
  • 32% for services in general
  • 6% for gas distribution

For the purpose of computing the advance income tax payments, the applicable rate is 15%. An additional 10% rate is applied to monthly taxable income in excess of BRL20,000 (approximately USD5,250).

The difference between the tax shown on the annual tax return and the amounts paid in advance must be paid by the last working day of March following the end of the fiscal year. If the amounts paid in advance exceed the tax shown on the annual tax return, the excess may be used to offset the tax due in a month following the fiscal year-end. A refund may be requested from the tax authorities within five years of the tax payment.

Alternatively, companies may pay tax quarterly based on actual quarterly income, computed under the accrual method.

The tax base for monthly estimated payments of SCT is generally 12% of gross income plus capital gains and other income, includ­ing financial income. This percentage is increased to 32% for ser­vice companies. SCT pay ments must be made at the same time as the income tax payments. The applicable tax rate is generally 9%.

Interest and penalties for late payments. The late payment of taxes is generally subject to the following:

  • Interest calculated at the rate applicable to the Special Liqui da-tion and Custody System (Sistema Especial de Liquidação e Custódia, or SELIC), which is published each month by the government
  • A daily fine of 0.33% of the tax due, up to a maximum penalty of 20% of the tax due (excluding interest)

In general, assessments resulting from a tax audit are subject to a penalty of 75% on the tax due. The penalty increases to 150% in the case of fraud. These penalties can be reduced by 50% if the payment is made by the last day of the appeal period (other pen­alty reductions are available during the appeal process). In such case, the effective penalty is 37.5%.

Dividends. Withholding tax is not imposed on dividends paid to residents and nonresidents out of profits generated on or after 1 January 1996.

For earnings recognized in 2014, the excess of dividends paid based on the statutory financial statements over the dividends determined under a “tax balance sheet” is subject to tax. A 15% withholding tax applies to such excess dividends paid to nonresi­dents. Dividends generated before 2014 are not subject to tax even if they are in excess of the dividends determined under the “tax balance sheet.” Dividends generated after 2014 are not subject to tax because the concept of “tax balance sheet” has ceased to exist.

Brazilian companies are allowed to pay a “deductible dividend,” which is called interest on net equity (INE), to their shareholders. INE is calculated by applying a benchmark interest rate called Taxa de Juros de Longo Prazo (TJLP) to the net equity of the Brazilian company, followed by certain adjustments provided by the tax law. INE is treated as deductible interest for tax purposes, which is subject to a 15% withholding tax when paid to residents and nonresidents. Payments to Brazilian residents are fully tax­able and are also subject to the Social Integration Program (PIS) tax and the social security financing contribution (COFINS). (For details regarding the PIS tax and COFINS, see Section D.) The Brazilian government has proposed changes to INE by capping the interest expenses to the lower of 5% or the TJLP rate. In addi­tion, the withholding tax rate would be increased to 18%. Con­gress did not approve the changes on time for them to become effective in 2016, but the government is aiming to present a new provisional measure.

Foreign tax relief. A foreign tax credit is available to Brazilian companies on income taxes paid overseas. In general, the foreign tax credit is limited to the amount of Brazilian CIT and SCT on the foreign-source income.

Determination of taxable income

General. CIT and SCT are due on a company’s taxable income, which is the net book income, as adjusted by the tax law. In gen­eral, operating expenses are deductible if the following conditions are satisfied: they are necessary, usual and common to the com-pany’s activity; they are actually incurred; and they are support – ed by proper documentation. However, the following expenses, among others, are not deductible:

  • Expenses related to fixed assets, including financial and operat­ing lease payments, depreciation and amortization, if the assets are not directly used in the production or commercialization of products and services.
  • Fringe benefits furnished to shareholders and officers if the ben­eficiaries are not identified and individualized (a 35% [effec tive rate of 53.84%] withholding tax is imposed on such payments). Neither the fringe benefits nor the withholding tax is deduct ible.
  • Donations in general, gifts and other non-compulsory payments.

Simplified methods are available for calculating the tax liability applicable to small businesses.

Inventories. Companies that have an integrated cost system must value inventory for tax purposes at the lower of cost or market value, using either the average cost or the first-in, first-out (FIFO) method. Direct cost and last-in, first-out (LIFO) methods cannot be used. In general, companies that do not have an integrated cost system must value finished products at 70% of the highest sales price of the product sold in the tax period. Work-in-process must be valued at either 80% of the finished product cost or 1.5 times the highest cost of the material content. Supermarkets and similar enterprises that sell a large number of goods may use a specific system for inventory valuation based on periodic and simplified counting.

Provisions. In general, the only deductible provisions are those for vacation pay and the 13th month salary (annual bonus).

Depreciation. Fixed assets may be depreciated using the straight-line method at rates provided by the Brazilian tax authorities. The following are some of the annual depreciation rates:

  • Real estate assets: 4%
  • Machinery and equipment: 10%
  • Vehicles: 20%
  • Computer hardware and software: 20%

Companies that operate two work shifts per day may depreciate machinery and equipment at 1.5 times the normal rate. If the company operates three shifts, it may double the normal rate.

For accounting purposes, companies may calculate depreciation at different rates (taking into account International Financial Reporting Standards [IFRS] criteria, which can affect, in addition to depreciation rates, inventory and other items).

Tax losses. Tax losses may be carried forward indefinitely, but can only offset up to 30% of the company’s taxable income for a tax period. No carryback is allowed.

Tax losses may be jeopardized if a company experiences a change in business activity and ownership control between the period in which losses were generated and the period in which losses would otherwise be used to offset taxable income. In general, non-operating tax losses can be offset only against non-operating gains if certain conditions are met. In a corporate restructuring involving a merger, the tax losses of the merged company must be forgone.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
State value-added tax (ICMS) 0 to 25
General rate for intrastate transactions 17 / 20
General rate for interstate transactions 12
General rate for interstate resale transactions involving imported goods 4
Transactions in which taxpayers located in
the South or Southeast (except for Espírito
Santo State) regions that remit goods and
services taxable under ICMS to taxpayers
resident in the states of the North, Northeast
Or Centre-West regions or Espírito Santo State
7
Exports Exempt
Federal value-added tax (IPI); the top rate
applies to luxury or superfluous goods, such
As alcoholic beverages and cigarettes
0 to 330
Tax on Financial Operations (IOF); imposed
On credit transactions, foreign-exchange
transactions, insurance operations and
financial investments
Loan operations
Daily rate (maximum annual rate of 1.5%) 0.0041
Additional rate 0.38
Foreign-exchange transactions 0.38 to 6.38
Insurance operations 0.38 to 7.38
Financial investments Various
Social Integration Program (PIS) tax; levied
on gross income at a rate of 1.65%; the tax
is a non-cumulative (VAT-type) tax for certain
taxpayers; certain companies, including local
financial institutions and companies that
manufacture goods in the Manaus Free Trade
Zone, are subject to the cumulative regime
and make the contribution at a 0.65% rate; the
tax is also levied on imports of goods at a rate
Of 2.1% and on services at a rate of 1.65%
0.65 / 1.65 / 2.1
Social security financing contribution
(COFINS); levied on gross income at a
rate of 7.6%; the tax is a non-cumulative
(VAT-type) tax for certain taxpayers;
certain companies, including local financial
institutions and companies that manufacture
goods in the Manaus Free Trade Zone, are
subject to the cumulative regime and make
the contribution at a 3% rate; the tax is also
levied on imports of goods at a rate of 9.65%
and on services at a rate of 7.6%, in most
cases; however, for certain imported goods
(for example, some plastic, rubber, textile,
Iron and steel products), the rate is 10.65%
3 / 7.6 / 9.65 / 10.65
Municipal Service Tax (ISS) 2 to 5
Social security contributions (INSS) on monthly salary, paid by:
Employer Up to 28.8
Employee; rate varies depending on amount
of remuneration (amount of employee
contribution may not exceed BRL513.01 [USD135] a month)
8 to 11
Severance Pay Indemnity Fund (FGTS), on monthly salary 8
Withholding tax on local payments of
professional service fees (creditable by
The recipient against corporate income tax)
Up to 27.5
Contribution for development of
Cinematographic and video phonographic
works (Condecine); in general, tax rate
applied to amounts paid to producers,
distributors and intermediaries abroad
for the exploitation of cinematographic
And video phonographic works
11

Miscellaneous matters

Foreign investment. All foreign investments, such as equity or debt investments, must be registered with the Central Bank of Brazil (BACEN) to assure the payment of dividends and interest, or the repatriation of capital. Nonresidents holding assets and rights in Brazil, such as equity investments, portfolio investments and debt investments, must be registered with the Brazilian tax authorities. On registration, the nonresidents obtain a tax iden­tification number (CNPJ). Failure to comply with the foreign-exchange regulations and associated requirements is subject to significant penalties. This particularly applies to evasion, false statements and private offsetting transactions.

Contracts for the supply of technology and technical services, and for the use of trademarks and patents between residents and non­residents must also be registered with BACEN and the Nation al Institute of Industrial Property (INPI). The registration allows Brazilian companies to pay and deduct the royalties up to the amounts prescribed by law.

Transfer pricing. Brazilian transfer-pricing rules apply only to cross-border transactions entered into between Brazilian com pa-nies and foreign related parties. A transaction entered into between a Brazilian company and a resident of a low-tax jurisdic­tion or a resident in a jurisdiction with a privileged tax regime is also subject to the transfer-pricing rules, even if the parties are not related. In general, Brazilian transfer-pricing rules do not fol­low the transfer-pricing guidelines outlined in the Organisation for Eco nomic Co-operation and Development (OECD) Model Convention and the US rules. For example, Brazilian transfer-pricing rules adopt fixed-profit margins on transactions carried out between re lated parties. Safe harbor measures may be applied to Brazilian exports.

Low-tax jurisdiction and privileged tax regime. The Brazilian low-tax jurisdiction (LTJ) list (black list) and privileged tax regime (PTR) list (gray list) are contained in regulations issued by the Brazilian tax authorities. New definitions of LTJ and PTR have been introduced.

Thin-capitalization. Under thin-capitalization rules, interest ex­pense arising from a financial arrangement with a related party is deductible only if the related Brazilian borrower does not ex­ceed a debt-to-net equity ratio of 2:1. In addition, interest expense arising from a financing arrangement executed with a party es­tablished in a LTJ or benefiting from a PTR is deductible only if the Brazilian borrower does not have a debt-to-net equity ratio of greater than 0.3:1.

Controlled foreign companies. Profits realized by a controlled for­eign company (CFC) of a Brazilian company are subject to in­come taxation on 31 December of each year regardless of any actual distribution by the CFC. Law 12,973/2014 introduced a new CFC regime. Under the new regime, qualifying CFCs are tax ed on an entity-by-entity basis (that is, individually regardless of the design of the corporate structure outside of Brazil). If cer­tain conditions are met, a tax consolidation of CFCs can be per­formed at the level of the Brazilian shareholder, through which the accounting losses of a qualifying CFC may offset taxable income of another CFC.

The earnings of CFC entities whose business is connected to oil and gas activities are exempt from tax in Brazil. Foreign tax cred­its of CFCs can be used against Brazilian corporate income tax, limited to the Brazilian corporate income tax due on CFC income. Under regulations issued by the Brazilian tax authorities (Ordi­nance 1,520/2014), the Brazilian shareholder can elect which non-Brazilian entities are subject to tax consolidation. Qualifying non-CFC entities are subject to tax in Brazil on an actual or deem­ed dividend distribution to a Brazilian shareholder. A deemed credit of 9% of the CFC income subject to tax in Brazil is avail­able for qualifying entities.

The Brazilian corporate income tax on CFC income may be sub­ject to installment payments over a period of eight years (12.5% payment per year), but the deferred tax liability is subject to ad­justment based on London Interbank Offered Rate plus the US dollar currency exchange variation.

Digital bookkeeping. The Public System of Digital Bookkeeping (Sistema Público de Escrituração Digital, or SPED) is a unified electronic storage of accounting and tax bookkeeping. It is in-tend ed to replace bookkeeping prepared on paper and to unify the preparation, storage, and certification requirements of the Board of Trade and of the tax authorities at the municipal, state and fed­eral levels. Most companies are now required to comply with the SPED.

International Financial Reporting Standards. Law 11,638/07 intro­duced changes to the Brazilian Corporate Law (Law 6,404/76) with respect to the preparation of financial statements for corpo­rations as well as for large companies, regardless of whether they are organized as corporations. This law represents a major step in the process toward harmonization of Brazilian GAAP with IFRS. Under this law, which took effect on 1 January 2008, large com­panies must prepare their financial statements under new Brazilian GAAP, which is consistent with IFRS principles.

This harmonization process was not intended to generate any tax consequences in Brazil. Consequently, the Brazilian IRS issued guidance on achieving such tax neutrality (called the Transitional Tax Regime). Effective from 2015, Law 12,973/2014 revokes the Transitional Tax Regime by realigning the income tax rules with the accounting rules (Brazilian GAAP), unless otherwise pre­scribed by the tax law. The early adoption of Law 12,973/2014 for the 2014 calendar year was optional.

Foreign trade of services integrated system. The Brazilian tax authorities require the reporting of inbound and outbound ser­vices and intangible transactions outlined in Brazilian Services Codification (Nomenclatura Brasileira de Serviços, Intangíveis e Outras Operações que Produzam Vari ações no Patrimônio, or NBS) through an integrated system with the Brazilian IRS, named Integrated Foreign Trade System for Foreign Services, Intangibles and other Transactions (Sistema Integrado de Comércio Exterior de Serviços, Intangíveis e Outras Operações que Produzam Varia-ções no Patrimônio, or SISCOSERV).

Special tax benefits. The Brazilian government has issued laws providing tax incentives to increase investments in Brazil. The following are the main programs:

  • Special Tax Regime for the Olympic and Paralympic Games of 2016: tax benefits related to the preparation for the Olympic and Paralympic Games that will take place in Brazil in 2016
  • Law 11,196/2005: tax benefits for investments in infrastructure and research and development (R&D)
  • Special Tax Regime for the Renewal and Expansion of Port Structures (Regime Tributário para Incentivo à Modernização e à Ampliação da Estrutura Portuária, or REPORTO): suspension of IPI, PIS, COFINS and import tax for investments in ports, warehousing and surveillance and monitoring systems
  • Reduction of employer social security contribution in some in­dustries, such as hospitality information technology and air and sea transportation: a contribution of 2.5% to 4.5% of gross in­come replaces the contribution as a percentage of payroll

Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the rate under domestic tax law.

Dividends

%

Interest

%

Royalties (k)

%

Argentina 0 15 (d) 15 (n)
Austria 0 15 (d) 15 (b)(l)
Belgium 0 15 (a)(d) 15 (c)(m)
Canada 0 15 (a)(d) 15 (l)
Chile 0 15 15
China 0 15 (d) 15 (l)
Czechoslovakia (h) 0 15 (d)(f) 15 (l)
Denmark 0 15 (d) 15 (l)
Ecuador 0 15 (d) 15 (l)
Finland 0 15 (d) 15 (c)(l)
France 0 15 (a)(d) 15 (c)(l)
Hungary 0 15 (d)(g) 15 (l)
India 0 15 (d) 15 (l)
Israel 0 15 (d) 15 (i)
Italy 0 15 (d) 15 (l)
Japan 0 12.5 (d) 12.5 (e)(l)
Korea (South) 0 15 (a)(d) 10 (l)(p)
Luxembourg 0 15 (a)(d) 15 (l)
Mexico 0 15 (d) 10
Netherlands 0 15 (a)(d) 15 (l)
Norway 0 15 (d) 15 (l)
Peru 0 15 (d) 15
Philippines 0 15 (d) 15 (l)
Portugal 0 15 (d) 15
South Africa 0 15 (d) 10 (p)
Spain 0 15 (d)(f) 10 (o)(p)
Sweden 0 15 (d) 15 (l)
Trinidad and Tobago 0 15 (d) 15
Turkey 0 15 (q) 15 (i)
Ukraine 0 15 (d) 15
Venezuela 0 15 (d) 15
Non-treaty countries 0 15 (j) 15 (j)
    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 the use of, or the right to use, copyrights of literary, artistic or scientific works, excluding cinematographic films and films or tapes for television or radio broadcasting, produced by a resident of a contracting state.
    c) The withholding rate is 10% for royalties for the use of, or the right to use, copyrights of literary, artistic or scientific works or for the use of, or the right to use, cinematographic films or television or radio films or tapes produced by a resident of a contracting state.
    d) Interest paid to the government of the other contracting state, a political subdivision thereof or an agency (including a financial institution) wholly owned by that government or political subdivision is exempt from tax.
    e) The withholding rate is 15% for royalties with respect to copyrights of cine­matographic films and films or tapes for radio or television broadcasting.
    f) The withholding rate is 10% for interest on certain long-term (at least 10 years) bank loans.
    g) The withholding rate is 10% for interest on certain long-term (at least eight years) bank loans.
    h) Brazil is honoring the Czechoslovakia treaty with respect to the Czech and Slovak Republics.
    i) This rate applies to royalties related to the use of, or the right to use, trade­marks. For other royalties, including payments for technical assistance and technical services, the rate is 10%.
    j) The withholding tax rate may increase to 25% if the recipient is resident in a low-tax jurisdiction or benefits from a privileged tax regime (see Section E).
    k) The tax treaties do not apply to the CIDE (see footnote [d] to Section A).
    l) The withholding tax rate is 25% for royalties paid for the use of trademarks.
    m) The withholding tax rate is 20% for royalties paid for the use of trademarks.
    n) The treaty does not provide a maximum rate for royalties, but provides that the domestic rate applies.
    o) The withholding rate is 15% for royalties for the use of, or the right to use, trademarks.
    p) The withholding tax rate applicable to royalties was reduced as a result of the most favorable clause contained in the protocol to the treaty. This clause pro­vides for a rate reduction if a future treaty establishes a lower rate. Because of the treaty between Brazil and Israel, the withholding tax rate on royalties was reduced to 10% (except for trademark royalties).
    q) Interest paid from Turkey to the Brazilian government, Central Bank of Brazil or the National Economic and Social Development Bank (BNDES) are exempt from Turkish tax. Interest paid from Brazil to the Turkish government, the Central Bank of the Republic of Turkey (Türkiye Cumhuriyet Merkez Bankasi) or the Turkish Bank of Exportation and Importation (Eximbank) are exempt from Brazilian tax.

Brazil has signed a tax treaty with the Russian Federation, but the treaty has not yet been ratified