Brazil Revokes Transitional Tax Regime And Introduces Significant Changes To Tax System
20 November 2013
Posted by: Author: Ernst & Young
Author: Ernst & Young
On 12 November 2013, Brazil’s Federal Government published
Provisional Measure No. 627 (PM 627), containing a long expected set of
rules that not only revoked the Transitional Tax Regime (TTR) but also
added new rules aimed at permanently aligning the Brazilian tax system
to the accounting model set forth by Law 11,638/2007.
PM 627 established new tax rules on the treatment of foreign profits
accrued abroad by legal entities and individuals resident or domiciled
in Brazil, as an attempt to reduce litigation on the matter and add
increased legal security for Brazilian investors doing business abroad.
new rules are subject to election for 2014 but are mandatory for 2015.
One important point to consider when deciding whether or not to make the
election for 2014 is that PM 627 grandfathered dividends and interest
on net equity payments made based on accounting books1
only for companies that formally elect to apply PM 627 effects as of 1
January 2014. In other words, companies that choose to maintain the TTR
until 2015 will be subject to taxation, plus penalty and interest on
distributions made in excess of the tax books since 2008.
the extent that said changes are broad and deeply affect relevant topics
in the Brazilian tax environment, more detailed Tax Alerts will be
issued in the near future in order to cover all topics with greater
accuracy. The main changes brought by PM 627 are summarized below.TTR revocation
long expected, by revoking the TTR, the Federal Government issued the
new rules contained in PM 627 in order to discipline the adjustments
arising from the adoption of new accounting methods and criteria due to
the convergence of Brazilian GAAP to IFRS. One of these relevant rules
deals with the effects treatment caused by the considerable change in
the leasing booking methodology, establishing that leased goods should
be comprised in the permanent asset of the legal entity starting from
the agreement formalization.
For investments evaluation through
the equity method of accounting, PM 627 also established segregated
registries for the figures arising from the invested company net assets
fair market valuation and its difference related to the expected future
Furthermore, it also brought a new
measurement and treatment of the goodwill based on expected future
profitability, establishing timeline and conditions for its tax
amortization in the hypothesis of the legal entity bearing the
investment being absorbed by other, due to incorporation, merger or
spin-off. It also clarified that the goodwill deductibility shall be
admitted only in cases when occurred between independent entities.
PM 627 also issued new rules on the tax treatment related to
advantageous purchases in the hypothesis of incorporation, merger or
spin-off of the ownership interest that generated said advantageous
PM 627 set forth that
the legal entity domiciled in Brazil, in some specific cases, can elect
to pay the Corporate Income Tax (CIT) and Social Contribution on Net
Profit (CSLL) over the profits earned abroad by its controlled entities
proportionally when the results are distributed. The payment shall be
made until the fifth year following the accrual period. In the first
year, it shall be considered as distributed at least 25% of the accrued
It has also given permission to consolidate (for an
experimental period of four years) profits and losses provided that the
invested legal entity is located in a country that has an in force tax
information exchange agreement with Brazil, and it is not a tax haven or
low tax jurisdiction.
Moreover, the new rules allowed losses
offsetting within a five years period carryforward in a same legal
entity domiciled abroad, as well as the compensation of CIT/CSLL due in
Brazil with taxes effectively paid abroad, including withholding tax
paid on dividends remittances.
It also has established a
differentiation between active and passive income for tax consolidation
purposes, and had promoted changes in the moment at which controlling
individuals in Brazil shall have its foreign profits taxed.Installment payments
PM 627 also made changes to the recently issued Law 12,865.
a) Pis/Cofins debts of financial institutions and insurance companies:
upfront payments, it was granted 100% reduction for late payment fines,
80% for isolated fines, 45% default interest and 100% over legal
For upfront payment, it shall be granted full exemption of fines, default interest and legal charges.
To enjoy the above benefits, it was necessary to renounce all lawsuits related to Pis/Cofins
enjoy the above benefits, it is necessary to renounce only the lawsuits
related to Pis/Cofins paid debts or subject to installments.
Law has not established tax treatment on gains arising from fines, default interest and legal charges exemption/reduction.
arising from fines, default interest and legal charges exemption shall
not be computed in the CIT, CSLL and Pis/Cofins taxable basis.
b) CIT and CSLL installment related to foreign earned profits
Allowed to pay (fully or partially) debts due up to December 31, 2012
Allows to pay (upfront or parcel) debts whose triggering events occurred up to December 31, 2012
possibility to divide debts into 120 installments, reducing fines by
80%, default interest by 40% and legal charges by 100%
Allows debts to be divided up to 180 installments, reducing fines by 80%, default interest by 50% and legal charges by 100%
Allowed possibility to use CIT and CSLL tax losses to liquidate fines and default interest amounts
possibility to use CIT and CSLL tax losses to liquidate fines and
default interest amounts as well as up to 30% of due taxes (main value)
Allowed possibility to use CIT and CSLL tax losses generated by controlled entities up to December 31, 2011
Allows possibility to use CIT and CSLL tax losses generated by controlling and controlled entities up to December 31, 2012
Topic not previously covered
possibility to use CIT and CSLL tax losses between controlling and
controlled that share common direct bond or through other controlled
No rule on treatment of gains related to fines, default interest and legal charges gain.
arising from fines, default interest and legal charges shall not be
computed in the CIT, CSLL and Pis/Cofins taxable basis.
1. In contrast to the objective of NI 1,397 – see EY Global Tax Alert, Brazilian Normative Instruction 1,397 may affect taxes due to IFRS conversion, dated 30 September 2013
This article first appeared in ey.com.