Brazilian Taxation On M&A Transactions

When considering a purchase of a Brazilian company, the first point to call the attention refers to tax succession. While in many countries the purchase of assets is enough to cease the responsibility for tax contingencies, in Brazil whenever a company assumes assets of another company and such assets comprise one or more businesses, the acquirer is responsible for tax contingencies generated prior to the acquisition. If the seller remains active in the same or another business, the acquirer is secondarily liable, but if the seller stops operating and do not start another business within 6 months, the acquirer is primarily liable. As a result, it is always necessary to have a tax due diligence prior to the purchase.

Another important point is registration of investment with the Brazilian Central Bank ("BACEN"), which is the evidence of the amount invested in Brazil, and guarantee that such an amount can be repatriated in the future without income taxation. Whenever the purchase is made outside Brazil, the buyer will inherit the registration previously belonging to the seller, and any amount paid that exceeds such a registration will not be recognized as investment for the purpose of repatriation.

Upon the inflow of funds to invest in a Brazilian company, there is Tax on Foreign Exchange Transactions ("IOF/FX"), levied at a rate of 0.38%. This rate is reduced to zero in case of issuance of shares by listed companies, or investment in such shares by qualified investors ("2689 Investors"). Please note that IOF/FX rates may be changed at any time by Presidential Decree, up to 25%.

For a foreign investor to qualify as 2689 Investor, it is mandatory to nominate a Brazilian bank as representative, to register as such with the BACEN and the Brazilian Securities and Exchange Commission ("CVM"), and to obtain a registration number with the Federal Revenue Secretariat ("RFB"). In addition, the foreign investor cannot be resident in a tax haven jurisdiction (currently, Brazilian blacklist includes 65 jurisdictions).

Brazilian companies may remunerate the shareholders with dividends or interest on net equity ("INE"). Dividends can only be paid out of net accounting profits (except in case of preferred shares with fixed dividends, which can be paid with capital reserves) and are exempt from WHT. Differently, INE can be registered as a deductible expense for the purposes of calculating Corporate Income Taxes (IRPJ/CSLL, levied at a combined rate of 34% or...