Brazil gets tough on tax havens

June 17, 2010 4:54 PM

Brazil's tax authority has added 21 jurisdictions to a new blacklist of tax havens and privileged tax regimes, including holding companies in the Netherlands and Luxembourg, Spain's international Spanish holding structures (ETVE) and US limited liability companies (LLC).

"The impact of the list on the legal community will be significant since Brazilian taxpayers investing abroad or foreign investors in Brazil will have to review their current structures in order to avoid an increase in the overall tax burden," says Machado Associados - Advogados e Consultores associate Henrique de Erbolato.

"Brazilian taxpayers and foreign investors should be prepared to face new restrictions and increased taxation," he adds.

The new list, which replaced the 2002 list containing 53 tax havens, was issued by Receita Federal do Brasil (RFB) on 7 June and will see named parties subject to stricter rules for transactions.

"Brazilian law establishes different rules for tax havens regarding withholding income tax rates, transfer pricing and thin capitalisation rules," explains Erbolato, who says that this means M&A lawyers will be faced with more careful decision-making.

Richard Winston of US firm K&L Gates LLP describes it as 'an interpretive' ruling. 'The tax authorities can change their positions at any time, and it is unclear whether the tax authorities may decide to expand their list of 'low tax jurisdictions' to include the entire new list of 'tax favoured regimes'. To most large US multinational companies, the preferential tax withholding rates on interest and royalties are also critical issues.'

The new blacklist lists the US LLC as a tax favored regime when the membership of the US LLC is composed of nonresidents, not subject to federal income taxation. The US LLC was not listed as a low tax entity, while the US corporation does not appear on either list.

New thin capitalisation rules will impact whether deals are financed via equity or debt, and the location of the buyer will increase in importance for M&A deals, adds Erbolato.

Restrictions on the deductibility of interest are substantially stricter for tax havens, such as 30 per cent of the Brazilian company's equity instead of 200 per cent in some cases.

Companies from tax havens doing business in Brazil are also subject to transfer pricing rules even if the transactions are not carried out between related parties, and there are no benefits for non-resident investments on the Brazilian stock exchange or some fixed income investments.

Other new entities on Brazil's blacklist include financial investment companies in Uruguay, Denmark's holding companies, international trading companies (ITC) in Iceland, Hungary's offshore KFTs and Malta-based ITCs and international holding companies (IHC).

(Source: Latin Lawyer)

17 June 2010