Disclaimer: The following article was published in “The Law Review” in April 2023, and is authored by the partners of Sacha Calmon Misabel Derzi Advogados. Click here to access the original version.


Introduction


Brazil was the fifth largest country by area (8.5 million km2; the largest in South America and in Latin America), the seventh by population (over 217 million people) and the 12th by GDP in 2022. Brazil is a democracy politically organised as a federal presidential constitutional republic, its capital is Brasilia, its most populous city is São Paulo, its official language is Portuguese and its currency is the real (BRL).


From a legal standpoint, Brazil has three levels of tax jurisdictions: federal, which has a national scope; state, split among the 27 Brazilian states (or federated unities); and municipal, with restricted local authority. The Federal District, where Brasilia is located, is an exception as it combines both the state and municipal authority.


The Brazilian Constitution displays very particular features with respect to taxation. Unlike the majority of foreign constitutions, its section dedicated to taxes is fairly extensive and detailed. One of the most relevant consequences of this characteristic is that tax litigation often contains constitutional issues and, therefore, is ultimately decided by the Brazilian Constitutional Court (STF). Another relevant consequence is that tax reform frequently requires constitutional amendment, whereby the underlying legislative procedure is correspondingly strict (e.g., approval by three-fifths of total senators and federal deputies).


Moreover, the Brazilian Constitution strives to avoid tax overlap by assigning a specific taxation authority to the different tax jurisdictions. As a result, the phenomenon of duplicate taxes (e.g., federal and state corporate income taxes) is not observed in the Brazilian tax system; on the other hand, there is a significant plurality of taxes.


In addition, the Brazilian tax litigation system has two spheres. The administrative sphere is under executive power in the respective tax jurisdiction, and it internally reviews tax assessments. Notably in the federal tax jurisdiction, this procedure of review has several features of an ordinary tax court structure (e.g., collegial body, ruling by majority, standards of review and appeals). The judicial sphere is the ordinary court structure with two levels of review: at the first level of review, the courts of justice (TJs) have authority over non-federal tax issues, the regional courts (TRFs) have authority over federal tax issues; and at the second level of review, the Superior Court of Justice (STJ) has authority over non-constitutional issues, and the STF has authority over constitutional issues.


Common forms of business organisation and their tax treatment


Owing to several statutory and regulatory, including non-tax, requirements generally applicable to businesses, the choice between subsidiary versus branch tends to favour the corporate form. Moreover, a Brazilian branch of a foreign entity is treated as a corporation for income taxation purposes; thus, there is no significant advantage in a branch structure unless otherwise required in specific industries.


Generally, the main bureaucratic steps to be taken by foreign investors are to:


  1. register the new entity with the regional business registry;
  2. obtain a business licence from the municipal authority;
  3. apply for a taxpayer number from the Brazilian Federal Tax Authority (RFB);
  4. register the foreign investment with the Brazilian Central Bank (BCB); and
  5. if operating in the capital market, register with the Brazilian Securities and Exchange Authority (CVM).


It is mandatory to appoint an individual resident in Brazil as the entity's representative for all legal purposes. It is also mandatory for an entity's officers to have residency in Brazil.


i Corporate


The two main types of corporate entities in Brazil are the limited liability company and the corporation (SA). Brazil does not have elective entity classification rules, and both the limited liability company and the SA types are treated as corporations for tax purposes. As a general rule, foreign entities are also treated as corporations for tax purposes.


From a corporate standpoint, a limited liability company has features of both a partnership and a corporation, and its functions can be exercised with relatively little burden. On the other hand, an SA can be privately held or publicly traded, in the latter case being subject to stricter regulation by government agencies.


ii Non-corporate


Non-corporate entities are generally not appropriate for foreign investors. However, investment funds, classified as non-corporate joint ventures, are broadly used for private equity investments, and as a general rule, there are no entity-level taxes applicable.


Direct taxation of businesses


The direct taxation of businesses in Brazil is a result of two federal taxes: the corporate income tax (IRPJ) and the social contribution on net profits (CSLL). For all investment purposes, these taxes work in tandem and are regarded as one – even for tax treaties purposes.


i Corporate income taxation


Determination of corporate taxable income


The default method for determining corporate taxable income in Brazil follows the general international determination of net income, and it is exclusively on an accrual basis: gross income minus deductible business expenses in the period, then adjusted for statutorily provided exclusions and inclusions. Gross income is broadly defined as the sum of all revenue from the sale of goods, provision of services, capital gains, financial investments, etc. Deductible business expenses are broadly defined as all expenses necessary for the business continuity and for the maintenance of its source of income, and usual and normal for the type of transaction, operation or activity. Moreover, as this method of calculation starts from the book's net profit, exclusions and inclusions are done exclusively for tax purposes – Brazil follows the International Financial Reporting Standard standards and applies the one-book system, not the two-book system. This method is denominated actual profit.


As a general rule, depreciation and amortisation annual rates follow the straight-line method and vary according to the type of asset. Certain accelerated methods are available for incentivised activities, goals, projects and micro-regions in Brazil.


In certain cases, an alternative method for determining corporate taxable income is possible: deemed profit is calculated by multiplying the entity's revenue, excluding capital gains, by certain deemed profit margin rates, which vary based on business activity (8 per cent is the general rate, 32 per cent is the highest rate). This method allows for either an accrual basis or cash or receipt basis, but it is not available for entities with annual revenue that exceeds 78 million reais, financial institutions in general and entities who earn foreign-sourced income, among others. This method is the denominated deemed profit method and its tax advantages increase in diametrical opposition to the amount of deductible expenses.


Capital gains taxation


Under the actual profit method for determining corporate taxable income, the return on the sale of capital assets composes the taxable base, thus not being subject to a separate taxation method.

On the other hand, under the deemed profit method, the return on the sale of capital assets is not subject to the above-mentioned deemed profit calculation, but to the general logic of capital gains taxation: the taxable base is the excess of the value received over the tax basis. The holding period is not relevant.


Accumulated losses


The actual profit method does not allow for capital gains or capital loss calculation, so there are no basketing rules for ordinary versus capital gains and loss offsetting. Net overall losses in a certain period can be carried forward indefinitely and cannot be carried back, and offsetting accumulated losses for tax purposes is limited to 30 per cent of current adjusted net profits. The STF recently ruled that this amount limitation is constitutional.


There are restrictions to offsetting accumulated losses after a corporate reorganisation:


  1. the 30 per cent limitation still applies even if the entity liquidates;
  2. after a merger or consolidation, the acquiring entity is not allowed to offset the target entity's accumulated losses;
  3. if a change of control and a change of business line occur jointly, the entity is not allowed to offset its own accumulated losses that were generated prior to those events; and
  4. after a merger or consolidation, the acquiring entity is allowed to offset its own accumulated losses against the target entity's profits, but there are questionable legal precedents hindering this allowance when there is a change of control.


The deemed profit method does not allow for loss calculation as it is based on revenue. Therefore, if a certain sale of capital assets generates a loss, or if the entity's deductible expenses in the period exceed its revenue (overall net losses), there is no allowance for offsetting and carrying-over losses.


Rates


For both the actual profit method and the deemed profit method, the top IRPJ rate is 25 per cent (a 15 per cent flat rate plus an additional 10 per cent on income exceeding 20,000 reais per month) and the CSLL rate is 9 per cent; thus, the top aggregate corporate income taxation rate is 34 per cent.


Administration


Corporate income taxation in Brazil is exclusively administered by the federal tax authority, the Federal Revenue of Brazil (RFB), which is a well-funded institution that employs highly skilled personnel and tax technology. Filing deadlines vary according to the specific regime applicable (e.g., annually, quarterly or monthly by estimates). There are no public-known guidelines about routine audit cycles, but a five-year statute of limitations is applicable. High-profile taxpayers, defined as those with annual gross income, debts, payroll or import and export transactions above certain thresholds, are subject to closer monitoring by specialised teams.


Taxpayers may request a private letter ruling from the RFB on specific topics. Private letter rulings issued by RFB's regional subdivisions to third-party taxpayers may be used as persuasive precedents by other taxpayers. Private letter rulings issued by RFB's national coordination body (Cosit) to third-party taxpayers, including to ensure uniform application of tax rules by the regional subdivisions, are binding precedents for all of the RFB's administrative tax purposes. However, private letter rulings historically demonstrate strong bias against taxpayers, so requesting one is only recommended in rare situations.


In the case of a tax assessment, taxpayers may request a review by the RFB's regional subdivision with jurisdiction over the matter (DRJ). The taxpayers may appeal the DRJ's decision to the ordinary chambers of the RFB's appellate body (Carf) and an automatic appeal occurs if the DRJ's decision changes the tax assessment in any way that reduces the tax debt previously assessed. Taxpayers and the RFB may appeal an ordinary chamber's decision to the upper chamber (the Superior Chamber of Tax Appeals), and the latter's decision is final for tax administrative purposes. Taxpayers may challenge final tax assessments in the judiciary.


Moreover, Carf is a collegial body not bound by the RFB's private letter rulings, and its chambers are composed of representatives from the RFB and taxpayers in equal numbers, which provide minimal fairness to the procedure of tax assessment review. However, the president of each chamber, necessarily an RFB representative, holds tiebreaker vote authority, which historically results in an overwhelming majority of decisions against taxpayers.


Tax grouping


Brazil does not allow for domestic tax consolidation, but the equity method is applicable for book-registering relevant corporate investments. On the other hand, the CFC rules allow for worldwide tax consolidation among CFCs in certain circumstances (see below).


ii Other relevant taxes


In addition to the corporate income taxation discussed above (IRPJ and CSLL), there are several key taxes applicable to domestic corporations that foreign investors must be aware of.


At the federal level:


  1. withholding income tax on cross-border transactions (IRRF) with an ordinary 15 per cent tax rate and a 25 per cent tax rate applicable to beneficiaries located in black- and gray-listed jurisdictions;
  2. the VAT-like social contributions PIS and Cofins, which aggregate tax rates vary according to the regime applicable and other factors, as a rule: in the non-cumulative regime, which allows for credits along the supply and service chains, 9.25 per cent on ordinary revenue and 4.65 per cent on financial revenue; and in the cumulative regime, 3.65 per cent;
  3. the cross-border version of PIS and Cofins that is applicable on the import of services and certain products (PIS-Import and Cofins-Import) – the general aggregate rate for services is 9.25 per cent, and the rates for products vary significantly;
  4. for the contribution on cross-border payments for technical services and royalties (Cide-Remittance) with a 10 per cent tax rate;
  5. federal VAT on industrialised products (IPI), which tax rates vary significantly depending on the products' nature;
  6. import tax (II), which rates also vary according to the goods' nature; and
  7. tax on currency exchange operations (IOF-Exchange), which base rate for cross-border currency exchanges is 0.38 per cent.


At the state level, there is VAT on goods, communication and inter- and intra-state transportation (ICMS). The rates vary according to products and regions, among other factors.


At the municipal level, there is a non-VAT services tax (ISS), which does not allow for credits along the services chain, and its cross-border version applicable on the import of services (ISS-Import). Local authorities may establish rates between 2 and 5 per cent according to the service's nature.


Tax residence and fiscal domicile


i Corporate residence


From a Brazilian tax perspective, a corporate entity is regarded as a tax resident if its administration headquarters are located within Brazil's territory (i.e., its place of management and control). Place of incorporation, place of registration and other factors are not controlling. If Brazilian tax residency is not desired, formally appointing headquarters and holding board meetings in Brazil is to be avoided.


ii Branch or permanent establishment


A domestic branch, office, agency or representation of a foreign entity is treated as a Brazilian corporation for income taxation purposes. There is no domestic rule or definition of permanent establishment, so further considerations in this regard are not significantly consequential for domestic tax purposes. To avoid the compliance burden and the fiscal risk related to profit allocation and connected matters, a domestic subsidiary is preferable.


Tax incentives, special regimes and relief that may encourage inward investment


i Holding company regimes


There is no special regime applicable to holding companies.


ii IP regimes


There is no special regime applicable to IP.


Recently, decades-long statutory limitations on the deduction of cross-border royalty payments have been revoked as part of the new transfer pricing rules.


iii State aid


There is no domestic rule or definition of state aid, but there are several beneficial tax regimes in Brazil. The most relevant are the following.


  1. Sudam and Sudene: certain business located in north and north-eastern Brazil may claim a 75 per cent IRPJ reduction, thus going from 25 to 6.25 per cent. As a result, the top aggregate income taxation rate goes from 34 to 15.25 per cent. In exchange, it is mandatory to reinvest in the business the additional amount of profits traceable to the tax rate reduction.
  2. Manaus Free Trade Zone: under the administration of Suframa, the Manaus Free Trade Zone currently encompasses a large area in north Brazil. Certain business located within it may gain several federal and state tax benefits, including tax exemptions and simplified trade compliance.
  3. Reidi: certain infrastructure businesses in the sectors of transport, sanitation, shipping ports, energy and irrigation may claim PIS and Cofins exemption if they fulfil certain requirements.
  4. State and local tax and compliance benefits: states and municipalities may offer tax or compliance special regimes, or both, to qualifying business.


Withholding and taxation of non-local source income streams


i Withholding outward-bound payments (domestic law)


Dividends remitted abroad are exempt from IRRF. As a general rule, all other income remittances abroad (e.g., interests, royalties, compensation for services and rent) are subject to 15 per cent IRRF on a gross basis. The taxable base includes gross-up amounts, if any. Beneficiaries located in black- and gray-listed jurisdictions may be subject to an increased 25 per cent IRRF.


In addition, remittances abroad may also be subject to the following non-income withholding taxes (only IOF-Exchange is ordinarily applicable to all remittances abroad):


  1. PIS/Cofins-Import at an aggregate 9.25 per cent rate on the gross payment in exchange for imported services plus the PIS/Cofins-Import itself and the ISS-Import (grossed-up base). There is a pending case before the STF that could significantly affect PIS/Cofins-Import's scope of application;
  2. Cide-Remittance at a 10 per cent rate on the aggregate monthly gross payments of royalties and compensation for technical services. There is a pending case before the STF that could significantly affect Cide-Remittance's scope of application;
  3. ISS-Import at a rate between 2 and 5 per cent (final rate pursuant to municipal legislation) on the gross payment in exchange for imported services; and
  4. IOF-Exchange at a general 0.38 per cent rate on the exchanged amount.


Considering the above, remittances abroad in compensation for imported services are the highest-taxed streams of income to foreign beneficiaries, with an aggregate effective tax rate ranging from 40 to 50 per cent. Moreover, the non-income withholding taxes described above do not qualify for tax treaty benefits. It is recommended that business planning takes this into account.


Moreover, the interest on net equity (JCP) is a deduction and non-inclusion kind of hybrid corporate distribution, deductible from the payer's taxable base as interests, but not able to be included in the payee's taxable base as dividends. Several foreign jurisdictions recognise the JCP as a legitimate equity payment, but recent international tax developments (anti-hybrid rules) have diminished their number. In any case, the potential tax advantage is a 19 per cent income tax rate reduction (15 per cent IRRF instead of 34 per cent IRPJ and CSLL).


ii Domestic law exclusions or exemptions from withholding on outward-bound payments


The only general IRRF exemption is for dividends remitted abroad.


iii Double tax treaties


Brazil does not have an extensive tax treaty network, and in-force tax treaties generally do not provide significant benefits with respect to IRRF, as treaty rates rarely go below the 15 per cent ordinary domestic withholding tax rate.


Brazilian double tax treaties, however, provide relief against Brazil's own CFC rules, to the extent that Article 7 is interpreted as preventing income inclusion prior to actual distribution. The RFB has issued binding private letter rulings with the opposite conclusion, and Carf has precedents in both ways, but the only STJ precedent on the issue ruled in favour of the taxpayers. The fact that Brazilian double tax treaties, as a rule, do not contain a saving clause adds to the litigation, even though Organisation for Economic Co-operation and Development and United Nations commentaries on the model tax treaties state the existence of implicit compatibility of Article 7 and CFC rules.


iv Taxation on receipt and foreign tax credits


Corporate entities tax-residents in Brazil are subject to corporate income taxation on a worldwide basis. Consequently, all foreign-source income, even dividends, are included in the corporate taxable base under the actual profit method – the deemed profit method is not allowed if the entity earns foreign-source income.


As a general domestic rule for double taxation relief, direct foreign taxes on income (i.e., foreign withholding income taxes) can be credited against the Brazilian taxes owed. Foreign tax credits are limited to:

  1. the amount of foreign tax on income actually paid; domestic statutory and regulatory rules do not provide further guidance about qualifying criteria for foreign taxes on income, mandatory nature of the foreign tax payment, and adjustments for later-in-time modifications to the foreign taxes paid (overpayment and underpayment);
  2. the amount of IRPJ and CSLL on the related foreign-source income; and
  3. the amount of IRPJ and CSLL owed by the entity after the foreign income inclusion but to prior to the foreign tax crediting.


Computation mechanics provide for ordering rules between IRPJ and CSLL compensation, the reason being that the tax revenue from each of theses taxes have different budgetary contingencies. Excess foreign tax credits (i.e., foreign tax credits that exceed (c), which occur when domestic current net losses partially or entirely absorb the foreign income) can be carried over indefinitely, but the domestic rules for crediting against other federal taxes do not apply.


Indirect foreign taxes (i.e., corporate income taxes paid by the foreign entity prior to forming the distributable profits out of which the dividends are paid) do not receive the same double taxation relief treatment. With respect to foreign entities that are not CFCs but in which the Brazilian corporate shareholder has meaningful influence (as a general rule, at least 20 per cent of voting power but less than necessary for control), the domestic rules only expressly allow for direct foreign tax credits, meaning that indirect foreign taxes are not allowed. With respect to foreign entities that are not CFCs and in which the Brazilian corporate shareholder does not have meaningful influence, there is no specific rule either way (also no income look-through rule), so only the general direct foreign tax credit rules discussed above are applicable.


Taxation of funding structures


i Thin capitalisation


Brazilian thin capitalisation rules allow for a debt:equity ratio not exceeding 2:1 for purposes of limiting the deduction of interests remitted to foreign related parties (individuals and entities, directly and indirectly connected). The ratio is reduced to 0.3:1 if the payee is located in a blacklisted and graylisted jurisdiction.


ii Deduction of finance costs


If finance costs qualify as deductible expenses under the general rules previously discussed and under the thin-capitalisation rules, no additional tax rules are applicable to prevent the deduction.


iii Restrictions on payments


Dividend payments are limited to the amount of distributable profits. Certain regulatory requirements may be applicable for specific sectors (e.g., the financial industry) and compliance requirements are generally applicable for remittances abroad (e.g., registering the operation before the Brazilian Central Bank).


iv Return of capital


As a general rule, the reduction or return of capital is not a taxable corporate event. Corporate and compliance requirements are applicable, though.


Acquisition structures, restructuring and exit charges


i Acquisition


For the same reasons foreign entities tend to operate in Brazil through a subsidiary, the acquisition of Brazilian businesses generally occurs through a domestic entity. Financing strategies (debt versus equity) vary significantly, being dependent on the level of access to domestic and foreign third-party funds.


Moreover, currently there is a significant tax litigation trend related to amortising goodwill that results from business combinations. In the case of an acquisition ultimately funded by a foreign investor through an equity chain, Carf has issued rulings disallowing goodwill amortisation by the Brazilian subsidiary based on the highly questionable argument that the acquisition burden is exclusively attributable to the foreign investor. Taxpayers have had success in challenging this position.


ii Reorganisation


As a general rule, capital contributions and corporate reorganisations per se (i.e., mergers, demerges, changes in corporate type, drop-downs and spin-offs) are not taxable events. However, certain ownership transfers among non-related parties (e.g., the sale of shares) within a corporate reorganisation step plan are taxable events and the federal tax authority is sensible to strategies that try to hide their occurrence. Moreover, there are requirements for amortising goodwill that result from business combinations, and currently there is a significant tax litigation trend related to it, notably when it is part of a merger step plan.


iii Exit


As a general rule, Brazil imposes income tax on the sale of a Brazilian subsidiary's shares by a foreign direct parent in accordance with the following schedule: 15 per cent tax rate on capital gains that do not exceed 5 million reais; 17.5 per cent tax rate on capital gains that exceed 5 million reais but do not exceed 10 million reais; 20 per cent tax rate on capital gains that exceed 10 million reais but do not exceed 30 million reais; and 22.5 per cent tax rate on capital gains that exceed 30 million reais. Foreign investors located in black- or gray-listed jurisdictions are subject to a flat 25 per cent tax rate. The buyer, or their representative tax-resident in Brazil, is responsible for withholding the tax.


Currently there are no specific rules applicable to the acquisition by a foreign entity of shares of a third-party foreign entity that indirectly holds shares of a Brazilian entity (i.e., indirect sale of a Brazilian subsidiary). However, there are a few Carf's isolated rulings for taxing the indirect capital gains. In any case, ultimate beneficial ownership change must be reported to the RFB.


There are no tax anti-inversion rules to prevent ultimate management of a Brazilian business from being transferred to a foreign jurisdiction.


Anti-avoidance and other relevant legislation


i General anti-avoidance


The Brazilian national tax code contains a general anti-avoidance rule (GAAR), but its application is conditioned to further statutory guidance. Until the new transfer pricing rules, no statute was enacted to expand on this abstract authorisation; thus, Brazil's GAAR technically has had little concrete application to date. In 2022, the STF ruled in favour of Brazil's GAAR constitutionality, but reinforced the necessity of additional statutory guidance for the rule to the applicable and, in any case, the concrete repercussions of this ruling are still not clear. Despite all this, tax authorities often use some variation of the substance-over-form doctrine to justify tax assessments and positions. It is still not clear the extent of GAAR application in the new transfer pricing environment.


ii Controlled foreign corporations


Brazilian corporate entities are subject to income taxation on a worldwide basis, and Brazil's anti-deferral controlled foreign corporation (CFC) rules provide an almost full-inclusion system. Individuals are not included in the definition of control for the purposes of these rules, and this is a tax loophole regarded by the courts as legitimate. The CFC included income is subject to the ordinary 34 per cent IRPJ and CSLL rate under the actual profit method.


Pursuant to the CFC rules, authorisation for worldwide tax consolidation among CFCs (a Brazilian controlling entity may decide which CFCs to consolidate) and a 9 per cent CSLL tax credit in certain circumstances are postponed to 2024. In any case, the extreme features of the CFC rules prevent Brazil from being a tax advantageous jurisdiction for international headquarters.


Moreover, worldwide tax consolidation among CFCs necessarily allows for foreign gain and loss offsetting. On the other hand, overall foreign losses cannot be offset against Brazilian profits, only rateably carried over by the CFCs. In any case (individualised or consolidated), there is no statute of limitations for foreign accumulated loss carry-over, the 30 per cent current adjusted net profits limitation is not applicable and offsetting is conditioned to reporting the accumulated losses to the RFB.


In relation to CFCs, foreign corporate income taxes can be rateably credited against the Brazilian IRPJ and CSLL on the included foreign-source income amount. Similar credit limitations as discussed above are applicable, but these are calculated before domestic accumulated loss offsetting. Excess foreign tax credit carry-over is also allowed. However, domestic statutory and regulatory rules do not provide further guidance with respect to calculating the credit limitations in the case of tax consolidation. Furthermore, there are no specific rules with respect to dividends received out of residual profits from previously included CFC income (i.e., previously taxed income), so the general direct foreign tax credits rules above discussed are applicable but there is no relief against double Brazilian corporate income taxation – first, on foreign profits pursuant to CFC rules and, second, on the same foreign profits when dividends are actually paid.


iii Transfer pricing


As part of the effort to join the OECD and to prevent further detrimental consequences from United States's new foreign tax credit regulations (TD 9959), in December 2022 Brazil enacted new transfer pricing rules. The new legislation largely adopts the well-known international TP standards (e.g., the arm's-length principle, the definition of related party transactions, the most appropriate method principle and comparable transaction requirements), thus abandoning Brazil's previous unique system. As these new rules are recent and there are no related legal precedents yet, caution is recommended when applying them.


iv Tax clearances and rulings


As discussed above, a private letter ruling is an alternative available to taxpayers to increase the level of tax certainty. However, owing to historical bias against taxpayers, it is an alternative rarely recommended. Moreover, a private letter ruling or other tax clearances and rulings are not a mandatory precondition for a transaction.


Year in review


In 2022, some key tax developments were:


  1. the expansion of the Brazilian offer in compromise rules, which created significant advantages for taxpayers to settle tax disputes;
  2. the new transfer pricing rules;
  3. several Carf rulings in favour of taxpayers with respect to goodwill amortisation in mergers and acquisition;
  4. new regulations restricting the scope of tax benefits in the tourist and entertainment sectors (Lei Perse); and
  5. an STF ruling favouring the tax authorities relative to the breadth of PIS and Cofins non-cumulative regime.


Moreover, Brazil held presidential elections that were characterised by strong political polarisation. Under the new leftist administration, in power since 1 January 2023, a major tax change already implemented is the revocation of the tiebreaker rule in favour of taxpayers at Carf and the return of the old tiebreaker voting authority of each chamber's president, who necessarily is an RFB representative. As a consequence, a recent trend of administrative rulings in favour of taxpayers is expected to be short-lived, despite isolated judicial challenges to this procedural modification.


Outlook and conclusions


The new administration has already announced its intention to implement major tax reform in 2023. This would be done in two parts: in the first half of the year, a VAT reform will be implemented, most likely by combining all Brazilian VAT and consumption taxes in general (PIS, Cofins, IPI, ICMS and ISS) into a single federal VAT with national application; in the second half of the year, an income tax reform will be implemented, which key feature would be to revoke the dividend exemption. This will create a two-level corporate income tax system (corporate level and shareholder level). It is still not clear how realistic this tax reform proposal is.


With respect to the OECD's Base Erosion And Profit Shifting initiative and its developments, no major changes are currently expected in Brazil. On the other hand, OECD membership is more likely after the implementation of the transfer pricing rules, and there is a trend for entering into new tax treaties that are more aligned with the organisation's model – like the one signed with the UK in 2022, but still not in force. Moreover, Brazilian CFC rules largely satisfy Pillar 2's requirements and objectives, but conflict with Article 7 of tax treaties and certain regional beneficial tax regimes are to be expected.


Footnotes

1 Misabel Abreu Machado Derzi and Fernando Daniel de Moura Fonseca are senior partners and Aluizio Porcaro Rausch is a partner at Sacha Calmon – Misabel Derzi, Consultores e Advogados.


MISABEL ABREU MACHADO DERZI

Sacha Calmon – Misabel Derzi, Consultores e Advogados

Misabel Abreu Machado Derzi is the founder and a senior partner at Sacha Calmon – Misabel

Derzi, Consultores e Advogados.


FERNANDO DANIEL DE MOURA FONSECA

Sacha Calmon – Misabel Derzi, Consultores e Advogados

Fernando Daniel de Moura Fonseca is a senior partner at Sacha Calmon – Misabel Derzi,

Consultores e Advogados.


ALUIZIO PORCARO RAUSCH

Sacha Calmon – Misabel Derzi, Consultores e Advogados

Aluizio Porcaro Rausch is a partner at Sacha Calmon – Misabel Derzi, Consultores

e Advogados.


SACHA CALMON – MISABEL DERZI, CONSULTORES E ADVOGADOS

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Vila da Serra

Nova Lima

Minas Gerais

Brazil

Tel: +31 3289 0900

Fax: +31 3286 3387

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