Updates To Brazilian Blacklist And Graylist And New Definition Of Substantive Economic Activity

On September 14, 2016, the Federal Revenue of Brazil ("RFB") published Normative Instruction RFB 1,658/2016, which updates the blacklist (list of tax havens) and the graylist (list of privileged fiscal regimes) and inserts a definition for "substantive economic activity" in Normative Instruction RFB 1,037/2010.

The modifications made by Normative Instruction RFB 1,658/2016 in the text of Normative Instruction RFB 1,037/2010 are described in the topics below. All modifications will become effective as of October 1st, 2016.1

1. Addition of new tax havens to the Brazilian blacklist

   03 (three) new tax havens have been added to the Brazilian blacklist. They are: Curaçao (CIT: 22% | WHT: 0%), Sint Maarten (CIT: 34% | WHT: 0%) and Ireland (CIT: 12.5% or 25% | WHT: 20% for non-residents).2

   As a reminder, payments of interest, royalties and for technical services are generally subject (along with other applicable taxes) to a Withholding Income Tax ("IRRF") of 15%. However, if these payments are made to a person located in a blacklisted jurisdiction, the applicable IRRF rate is increased to 25%.

2. "Suppression" of tax havens from the Brazilian blacklist

   02 (two) tax havens have been "removed" from the Brazilian blacklist. They are: the Netherlands Antilles (dissolved since 2010)3 and St. Kitts and Nevis (the jurisdiction had been repeated in Portuguese and English in the blacklist - now, only the Portuguese name has been maintained).

3. Addition of a new privileged fiscal regime to the Brazilian graylist

   As of October 1st, 2016, a new privileged fiscal regime will be added to the Brazilian graylist: it is the regime of Austria applicable to legal entities incorporated as holding companies.

   It is important to highlight that although certain privileged fiscal regimes (Denmark and the Netherlands) refer to "legal entities incorporated as holding companies that do not perform substantive economic activities",4 the Austrian regime refers only to "legal entities incorporated as holding companies". Therefore, for purposes of analyzing whether a particular Austrian legal entity is graylisted or not, one must only assess whether it is "incorporated as a holding company". If the legal entity in question is incorporated as a holding company, it is automatically regarded as graylisted.

   As a reminder, cross-border payments to graylisted entities are generally not subject to an increased rate of IRRF. However, there are relevant consequences that derive from...