New Legal Framework Introduces Changes To The Deductibility Of Royalty Payments And Royalty Remittance Rules

• Published date: 27 June 2023
• Subject Matter: Corporate/Commercial Law, Intellectual Property, Tax, Corporate and Company Law, Contracts and Commercial Law, Patent, Trademark, Income Tax, Transfer Pricing, Tax Authorities
• Law Firm: Venturini IP
• Author: Mr Louis Lozouet

In the past six months, Brazil has seen significant developments in tax legislation and foreign exchange regulation that will improve the process of remitting abroad royalties arising from IP contracts, as well as the deductibility of royalty payments.

1. New transfer pricing law

Brazil has recently enacted a new transfer pricing legal framework. Law #14,596 of 14 June 2023, published in the Brazilian Federal Official Gazette on 15 June 2023, establishes a transfer pricing (TP) framework in Brazil in line with the guidelines of the Organization for Economic Co-operation and Development (OECD).

The text of the new law, as sanctioned by the Brazilian President, is the same as the one approved by the Lower House of Congress and the Federal Senate (i.e., Provisional Measure # 1,552 published on 28 December 2022 converted into the new law by means of Conversion Bill #8, of 2023).

The new legal TP framework aims at integrating Brazil into the global value chains and mitigate both double taxation and double nontaxation scenarios. In brief, it amends the transfer pricing rules in Brazil by: adopting the arm's length principle for controlled transactions and broadening the related-party definition, bringing more freedom in the negotiation of contractual conditions between related parties; introducing functional (functions, assets and risks) and economic analysis for applying the new TP documentation rules; introducing the concept of comparability analysis (application of the comparable uncontrolled price - CUP - method, for instance); as well as introducing a modern international tax approach regarding cross border transactions dealing with commodities, intangibles, financial transactions and intercompany business restructuring, among other changes.

In relation to royalties arising from IP and technology transfer transactions, it is worth noting the major changes brought by the new TP model:

• Inclusion of the concept and technical aspects of intangible royalty transactions under the scope of the new TP model;
• Intangibles are normally considered as assets difficult to value and, therefore, would depend on a more individualized analysis of the risks and roles of each party involved;
• The legal ownership of the intangible asset is only a subsidiary element for determining the right to royalties Therefore, the performance of the so-called "DEMPE functions" (i.e., Development, Enhancement, Maintenance Protection and Exploitation functions) to determine whether an...