On December 21, 2015, the Brazilian Federal Revenue Service (Receita Federal do Brasil – “RFB”) issued the Executive Declaratory Act no. 03 (“EDA 3/15”) in order to reinsert the Dutch holding company regime in the Brazilian blacklist asPreferential Tax Regime (“PTR”).
Under Brazilian law, tax haven jurisdictions are those where income tax is assessed at a rate lower than 20%, or is non-existent, or where the domestic legislation imposes secrecy with respect to either equity participation or to its ownership. Currently, the applicable blacklist is established by Ruling RFB nº 1.037/10, but The Netherlands is not listed as such.
In addition to concept of tax haven jurisdiction, Brazilian tax law has broadened the rule in order to include also within the scope of stricter tax rules PTR that exist in certain jurisdictions, even if the jurisdiction themselves are not considered as tax havens.
PTR according to Brazilian tax law are favorable tax regimes in which:
- income is not taxed or is taxed at a maximum rate lower than 20%;
- tax benefits are granted to non-residents without requiring substantial economic activity;
- foreign income is not taxed or taxed at a maximum rate lower than 20%; or
- does not allow the disclosure of corporate structure or ownership.
The Dutch holding company regime was initially listed as a PTR. However, by the request of the Dutch Government, on June 22, 2010 Brazilian authorities suspended this inclusion until a final decision about the characteristics of the regime and its qualification as PTR.
Under the argument that the Dutch Government has not provided sufficient evidence that the Dutch company regime is in full compliance with the Brazilian anti-avoidance rules, EDA 3/15 revoked the suspension and reinserted this regime in the list of PTR, but limited the application to holding companies without “substantial economic activity”.
Different from other jurisdictions, neither Brazilian law nor case law provides for a definition or basic guidelines of what should be a minimum “substantial economic activity” for such purposes.
Consequences of being considered as a PTR are that:
- the ultimate beneficial owner of the foreign entity must be disclosed in order to allow the deduction of the payment in Brazil, among other requirements;
- Brazilian transfer pricing rules are applicable even if the foreign party is not related;
- thin capitalization rules are stricter than ordinary rules (the debt/equity ratio in 0.3 to 1, rather than 2 to 1);
- profits received by Brazilian companies from companies under PTR are subject to the Controlled Foreign Company – CFC rules, even in the case of affiliated companies, without the benefit of profit consolidation and tax deferral rules.
Finally, please note that the inclusion of the Dutch Holding Company in the concept of PTR has only prospective effects. Payments made or transactions carried out before December 21, 2015 are not affected by this rule.