Tax Haven Jurisdictions - Haven Or Hell?

1. Introduction

   Although internationally adopted, the expression "tax haven" has not been used in the Brazilian applicable legislation. Brazilian regulatory authorities do not like offshore jurisdictions, considered as "tax havens", because they believe that these jurisdictions have been misused in general with the specific purpose of (i) avoiding the payment of local taxes and/or (ii) not disclosing the identity of the true beneficiaries of the assets (which could be Brazilian residents pretending to be foreign investors just to avoid the reporting and other compliance requirements) and many times to facilitate transactions which would be regarded as questionable or illegal in the jurisdiction of domicile of the true beneficiaries. The fact is that the traditional offshore jurisdictions, the so-called "tax haven jurisdictions", have a bad image in many countries and not only in Brazil.

2. Definitions adopted in Brazil

   Brazilian tax legislation contemplates the concept of "favored taxation country or dependency" (país ou dependência com tributação favorecida) instead of tax haven or fiscal paradise (paraíso fiscal), and also defines the expressions "privileged fiscal regime" (regime fiscal privilegiado) and "related party" (parte relacionada).

   Favored taxation country or dependency means any country or dependency of a country that does not impose tax on income or, when imposes, it is a low-tax country, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum). This first definition is contained in article 14 of Law 9.430, of December 27, 1996, which introduced transfer pricing regulations in Brazil.

   Privileged fiscal regime means any jurisdiction that met one or more of the following requirements:

   it does not tax income or where the maximum applicable tax income rate is below 20%; it grants fiscal advantages to a non-resident individual or legal entity: without requiring that substantial economic activity be made in the country or dependency; or conditioned to the non-exercise of substantial economic activity in the country or dependency; it does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20% to such earnings; it does not permit access to information regarding the capital stock structure, ownership of assets or rights or to the economic transaction entered into between the parties. All the above-mentioned percentages may be reduced or changed at any time by the Executive Branch.

   This second definition is provided for in article 23 of Law No. 11.727, of June 23, 2008, which approved new wording for articles 24-A and 24-B of Law 9.430/96. Article 30 of Law 11.941/2009, clarified that it is not necessary to attend simultaneously and cumulatively all the requirements listed above and that it is sufficient to attend only one for a country or dependency to be treated as a privileged fiscal regime.

   For corporate purposes, "related party" is defined by Law No. 6.404, of December 15, 1976, as subsequently amended (the Brazilian Corporation Law – BCL) and its meaning includes any individual or legal entity resident or domiciled abroad (outside Brazil) whose capital stock characterizes its controller or affiliate. For tax purposes, the definition of "related party" is contained in article 23 of Law No. 9.430/1996.

   The terms "controller" and "affiliate" are defined by the BCL.

   Affiliate (coligada) is a company in which the investor has a significant influence over it (article 243, § 1 of the BCL, as amended by Law No. 11.941, of May 27, 2009).

   One company will have significant influence over another when it holds or exercises the power to participate in decisions on financial or operational policies of the affiliate (article 243, § 4 of the BCL, added by Law 11.941/2009).

   Significant influence is presumed to exist when one company holds at least 20% of the voting stock of another, but does not control it (article 243, § 5 of the BCL, added by Law 11.941/2009).

   Controlled company (controlada) is a company in which another company, known as the controller (controladora), either directly or through other controlled companies, has the rights of a partner in the first company which permanently grants to the controller prevalence in voting the first company´s corporate decisions and the power to elect the majority of its management (article 243, § 2 of the BCL).

   The following entities will be deemed to be related to the Brazilian company, for...