GSGA – Special Report – Brazilian Tax Review 03/2014 – April/May/June

Taxation of Profits of Controlled Foreign Companies (CFC): Double Taxation Conventions must prevail over domestic rules

The Superior Court of Justice (STJ) has recently decided a case involving the applicability of Brazilian CFC rules in cases in which the controlled company is located in a country with which Brazil has a Convention for Avoidance of Double Taxation (DTC). Under the STJ decision, whenever there is a valid DTC, the profits calculated by a controlled company cannot be taxed in Brazil by the parent company since, in these cases, the DTC provisions must prevail over domestic legislation. Consequently, based on the application of DTC provisions, the STJ held that these profits will be taxed only in the residence of the controlled company. However, it should be noted that, although this precedent is favorable to taxpayers, this issue is not yet settled in Brazilian courts. This is especially so since federal attorneys are still appealing these cases in order to bring this matter before the Supreme Court (STF).

Tax Effects of IFRS adjustments and Changes in CFC rules converted into Law 12,973.

On May 14, 2014, Provisional Measure 627/13 was converted into Law 12,973. As we have mentioned on other occasions, this Provisional Measure introduced a number of changes to Brazilian tax legislation in order to harmonize the calculation of Corporate Income Tax ("IRPJ"), Social Tax on Net Profit ("CSLL"), Social Integration Program Tax ("PIS") and Social Security Financing Tax ("COFINS") with IFRS criteria. Apart from these changes, the new rule also extinguished the Transitional Tax System (RTT) and introduced a new tax on controlled foreign companies (CFCs). These changes in legislation will come into force in 2015. However, taxpayers may choose to apply these changes already for the 2014 tax year. According to Normative Ruling 1,469, taxpayers who choose to anticipate the effects of the new law for 2014 should formalize this option though their tax return (DCTF - Federal Tax Credits and Debits Statement) for taxes due in May, for which the deadline is July 21.

Swiss Entities that Are Considered Established under a Privileged Tax System)

On June 6, 2010, the Brazilian government issued a new blacklist under Normative Ruling ("Instrução Normativa") 1,037/2010, which included Switzerland as a tax haven. However, in response to a Swiss government request, Brazilian tax authorities immediately suspended Switzerland's blacklisted status under...