GSGA – Special Report – Brazilian Tax Review 02/2014 – February/March

Withholding Income Tax on Transactions between Residents and Nonresidents - New Rule on Capital Gains and Technical Services

On March 7, 2014, Brazilian Federal Tax Authorities issued a new Normative Ordinance (IN 1,455) regarding the withholding income tax on transactions between residents and nonresidents. Among the issues addressed by the Normative Ruling, two specific points must be highlighted: (i) taxation of capital gains earned by nonresidents; and (ii) the extension of the definition of technical services to determine the withholding income tax rate.

Capital gains

Under IN 1,455, capital gains earned by a nonresident on the sale of Brazilian assets are subject to the withholding income tax at a 15% rate, or at a 25% rate if the beneficiary of the income is located in a blacklisted country. The controversial point presented in IN 1,455 is the way the capital gains must be calculated, especially with respect to the currency that must be used to convert the cost of the investment sold.

Historically, the capital gains earned by a nonresident have been calculated in foreign currency, which means that the selling price and the cost of the investment made by the nonresidents were usually converted to Brazilian currency at the exchange rate on the transaction date.

However, IN 1,455 has introduced different criteria, requiring the capital gains to be calculated in Brazilian currency. This means IN 1,455 requires the cost of the investment sold by the nonresident to be calculated based on the historical value of the investment made in Brazilian currency, which could lead to higher taxation regardless of the absence of capital gains in the foreign currency (i.e., it taxes changes in the exchange rate). IN 1,455 is subject to broad challenges in this regard since it introduces a new calculation method without legal grounds.

Extension of the Definition of Technical Services

IN 1,455 confirms the understanding that technical services are subject to the withholding income tax at a 15% rate, or a 25% rate if the beneficiary of the income is in a blacklisted country. Additionally, it introduces a new definition of technical services, defining them as services in which "the performance relies on technical expertise or involves administrative assistance or providing advice, performed by an independent professional or through an employment relationship, or even through automated structures with clear technological content."

It is important to point...