Brazil puts Dutch holding companies regimes

Tax Insights
from International Tax Services
Brazil puts Dutch holding companies
back on ‘gray list’ of privileged tax
regimes
January 5, 2016
In brief
The Brazilian tax authorities on December 18, 2015, issued Declaratory Act 3/2015, which puts Dutch
holding companies with no substantial economic activities back on the privileged tax regime ‘gray list.’
Gray-list entities are subject to stricter thin capitalization, transfer pricing, and expense non-deductibility
rules.
In detail
Background
On June 4, 2010, the Brazilian
tax authorities issued Normative
Instruction 1,037/2010,
designating a number of
regimes as privileged tax
regimes (so-called gray-list
jurisdictions). Normative
Instruction 1,045/2010, issued
on June 24, 2010, amended the
original list.
The gray list initially included
Dutch holding companies that
lacked substantial economic
activities. This inclusion was
suspended by Declaratory Act
10/2010, issued on June 24,
2010.
The Brazilian tax authorities
now have reversed the exclusion
of Dutch holding companies
that lack substantial economic
activities from the gray list. This
was accomplished by issuing
Declaratory Act 3/2015 on
December 18, 2015, which
revokes Declaratory Act
10/2010.
The new rules took effect on
December 21, 2015, when
Declaratory Act 3/2015 was
published in Brazil’s official
gazette.
Consequences
Gray-list entities are subject to
stricter thin capitalization and
transfer pricing rules, even
when the relevant parties are
not related.
For example, interest paid or
credited by Brazilian entities to
related or unrelated parties
(individuals or legal entities)
that reside in a gray-list
jurisdiction is subject to a 0.3:1
debt-to-equity ratio (as opposed
to the standard 2:1 ratio).
Interest paid in connection with
loan principal that exceeds the
0.3:1 debt-to-equity ratio is
considered not deductible for
Brazilian income and social
contribution tax purposes.
There are additional
requirements for deductibility
as well, such as the requirement
to identify the effective
beneficiary of a payment and
proof of economic substance.
Transfer pricing rules also apply
to all transactions carried out
between Brazilian entities and
privileged tax regime entities, as
if they were related.
Payments to gray-list entities
generally do not affect income
tax withholding rates, as
opposed to payments made to
entities in blacklisted tax
havens/low-tax jurisdictions,
which are subject to a higher
withholding tax rate.
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Tax Insights
The takeaway
Multinational companies that own Brazilian entities that make payments to Dutch holding companies should consider
how these changes may affect their investments.
Let’s talk
For a deeper discussion of how this might affect your business, please contact:
International Tax Services, United States
John A. Salerno, US LATAX Leader
+1 (646) 471-2394
[email protected]
Jose Leiman
+1 (305) 381-7616
[email protected]
Rafael Vianello
+1 (646) 471-9809
[email protected]
Maria Bel
+1 (646) 471-1268
[email protected]
Daniel Landaluce
+1 (646) 471-7762
[email protected]
Lucia Echenique Fossati
+1 (646) 471-6294
[email protected]
Camila Silva Jimenez
+1 (646) 471-8794
[email protected]
Estevan Leal
+1 (646) 335-4838
[email protected]
International Tax Services, Brazil
Durval Portela
+55 11 3674 2582
[email protected]
Alvaro Pereira
+ 55 11 3674 2954
[email protected]
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