Wednesday, 13 April 2016

Brazil: Capital gains tax and CFC rules modified

Law 13,259/2016, published in Brazil’s official gazette on 17 March 2016, converts Provisional Measure No. 692/2015 (PM 692) into law, almost six months after its enactment in September 2015. Law 13,259/2016 contains changes to the capital gains tax modifications originally included in PM 692 and introduces some changes to the controlled foreign corporation (CFC) rules.

PM 692 revised the income tax rates applicable to capital gains derived from the sale of assets by individuals from a flat rate of 15% to progressive rates ranging from 15% to 30%. Law 13,259/2016 further revises the progressive rates, to a range from 15% to 22.5%.

It should be noted that the rules for the taxation of capital gains derived by nonresidents from the sale of assets located in Brazil refer to the rules for the taxation of Brazilian residents, which could include Law 13,259/2016. However, the application of the progressive rates to nonresidents must be analyzed on a case-by-case basis, and the changes under Law 13,259/2016 should not modify any specific preferential rates that may apply to certain qualified foreign investors.

Although Law 13,259/2016 states that it is effective retroactively as from 1 January 2016, laws that increase taxes may enter into effect only in the year following the year of enactment. Therefore, in practice, the changes to the capital gains tax rates should not apply until 1 January 2017.

Law 13,259/2016 also introduces a new article (article 82-A) into the provisions governing Brazil’s CFC regime. This provision was not included in PM 692.

Under the CFC rules, the taxation of profits of an “affiliated” entity (as opposed to a “controlled” entity) generally takes place at the time the profits are distributed to the Brazilian entity, provided the affiliated entity (on a cumulative basis): (i) is not subject to a nominal income tax rate lower than 20%; (ii) is not resident in a tax haven jurisdiction (a jurisdiction included on Brazil’s “black list”) or in a privileged tax regime jurisdiction (a jurisdiction on the “grey list”); and (iii) is not directly or indirectly controlled by a black or grey-list entity. Effective 1 January 2016, new article 82-A allows Brazilian taxpayers to elect to have the foreign profits of affiliated entities taxed on 31 December of each year (i.e. under the methodology applicable to controlled entities). However, the election will not be available where the affiliate is deemed a controlling entity under specific combined ownership circumstances provided under article 83 of Law 12,973/2014.

The Brazilian tax authorities still must issue specific guidelines regarding the election mechanism.

Source: Deloitte