INTERNATIONAL CORPORATE TAX International Tax Brazil 17 December, 2006

TAX

Recent Administrative Rulings

Brazilian CFC Taxation - Administrative court exempts business profits from holding in Spain

Laws 9.249/95 and 9.532/97 introduced the concept of universal taxation in Brazil and ruled that profits of a controlled foreign company are subject to taxation in Brazil when distributed in the form of dividends. Further regulations ruled that such profits would also be subject to corporate income tax in Brazil when made available to the Brazilian parent company, such as when used to increase the controlled company’s capital, among other situations including dividend distributions.

Later on, the Provisional Measure (MP) 2.158/2001 determined that earnings of a controlled company are considered available and subject to taxation in Brazil on 12/31 of every year, regardless of distribution or utilization.

A previous decision of the Taxpayers Council had interpreted that profits arising from a controlled company in Spain should be taxed as dividends upon distribution in Brazil. However, in a recent shift of interpretation the Taxpayers Council understood that dividends distributed by a company in Spain are protected as business profits under the Brazil-Spain treaty to avoid double taxation, as long as they are taxable in Spain according to article 23 of the treaty.

Brazilian tax treatment of cost sharing agreements

The Brazilian tax authorities have recently ruled (Processo de Consulta nº 462/06- SRRF 8a. Região Fiscal) that services provided under a cost sharing agreement are treated as “administrative assistance and similar” and as such, subject to the taxation on import of services. A Consulta is a process whereby the taxpayer files a petition requesting tax authority’s interpretation on a specific tax matter. The ruling is not biding but prevents the application of penalties in the event of challenge upon compliance with its terms. kpmg.com.br

Even in situations when the payment by the Brazilian subsidiary is characterized as reimbursement of expenses to the parent company, the ruling recognizes the existence of “final beneficiaries” of the payments for services subcontracted by the parent company abroad on its behalf. As a consequence, such payments must be treated as administrative assistance.

Based on the above mentioned, the tax authorities decided in this ruling that the amounts paid, credited, delivered, used or remitted abroad, as remuneration for the continuous provision of financial services, human resources, risks management, procurement, etc are subject to withholding tax at a rate of 15%. In addition, based on the ruling such services are also subject to the other taxes levied on the import of technical services, such as CIDE, PIS and COFINS.

Finally, although not mentioned in the ruling, imports of services in general are also subject to Municipal ISS tax withholding at rates ranging between 2% and 5%.

For more information, contact a tax professional:

São Paulo office: Marienne S. Munhoz, [email protected] +55 11 2183-3182

Luiz R. Dardes, [email protected] +55 11 2183-3188

Pedro Anders, [email protected] +55 11 2183-3123

Murilo Mello, [email protected] +55 11 2183-3261

Fabiana Almeida, [email protected] +55 11 2183-6571

Rio de Janeiro office: Roberto Haddad, [email protected] +55 21 3515-40 0 0

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