Investing Today in Brazil:
Addressing Recent
Tax Challenges
Sponsored by
Thin Capitalization
Restrictions to Deduction of Expenses
Articles 24, 25 and 26 of Law 12,249
• Restrictions to the deduction of interest expenses paid to non-resident
parties (Related Parties or “Low Tax Jurisdictions or Privileged
Tax Regimes”)
• Restriction to the deduction of other expenses paid to non-resident
parties domiciled in “Low Tax Jurisdictions or Privileged Tax
Regimes”
Thin Capitalization Rules
Article 24 – Concept
• interest paid or credited by Brazilian sources,
• to individuals or legal entities, considered related as set forth by
article 23 of Law 9,430, resident or domiciled abroad,
• not incorporated in a country or territory with favorable taxation or
subject to a privileged tax regime,
• will only be deductible if the interest expense is treated as
necessary for the company’ activities and if certain legal
requirements are met.
Thin Capitalization Rules
Article 24 – interest paid or credited by Brazilian sources
• Only credit transactions (loans, financing) or also interest on net equity?
Specific rule for INE was implicitly repealed?
• Inclusion of EPP or installment sales?
Thin Capitalization Rules
Article 24 – to individuals or legal entities, considered related as
set forth by article 23 of Law 9,430, resident or domiciled abroad
• Article 23 – Head office, affiliate, branch, subsidiary, parent or
associated company, under common corporate control;
• Applicable to related parties that directly and indirectly participate in
the capital or also for those that indirectly participate.
• Applicable to commercial relationships
Thin Capitalization Rules
Article 24 – not incorporated in a country or territory with favorable
taxation or subject to a privileged tax regime
• If country or dependency with favorable taxation or privileged tax
regime: articles 25 and 26
Thin Capitalization Rules
Article 24 – will only be deductible if the expenses are treated as
necessary for the company’s activities and if the requirements set
forth in Brazilian tax laws are met
• Expenses paid or incurred in transactions or operations required for the
company’s activities – i.e., those that are usual and normal for the type
of transactions, operations or activities of the company.
Thin Capitalization Rules
Article 24 – will only be deductible if the expenses are treated as
necessary for the company´ activities and if the requirements set forth
in Brazilian tax laws are met
(i)
If direct participation, indebtedness may not be higher than
2x the share participation in the net equity of BrazilCo, on the
date of the interest accrual
(ii)
If no direct participation, indebtedness may not be higher
than 2x the net equity of BrazilCo, on the date of interest accrual
(iii)
If both tests are met, sum of indebtednesses with related
parties may not be higher than 2x the sum of share participation
of all related parties in BrazilCo’s net equity.
Thin Capitalization Rules
UKCo
10%
USCo
90%
FrCo
$20
$20
BrCo
Loan USCo = 200
Loan FrCo = 200
Net Equity = 100
Thin Capitalization Rules
Article 24 – Scope of the restriction
• Funding of all types and terms – exception: pass on transactions by
financial institutions;
• Whether or not the agreement is registered with the Central Bank of
Brazil;
• Debt transactions in which there is a guarantor (avalista or fiador),
proxy or any intervening party that is considered a related party.
Thin Capitalization Rules
Article 24 – Consequences of excess expenses
• expenses will not be treated as necessary
• expenses will not be considered deductible for IRPJ and CSLL
purposes. Formula to be issued
Thin Capitalization Rules
Article 25 – Concept
• interest paid or credited by Brazilian sources,
• to individuals or legal entities, incorporated in a country or
dependency with favorable taxation or subject to a privileged tax
regime,
• will only be deductible if the expenses are treated as necessary
for the company´ activities and if the legal requirements are
met.
Thin Capitalization Rules
Article 25 – “Tax Havens”
•
Country or dependency with favorable taxation – does not tax income or
taxes it at a maximum rate lower than 20%
•
Privileged tax regime:
•
does not tax (local or foreign) income or taxes it at a maximum rate
lower than 20%
•
grants tax benefits to a non-resident individual or legal entity without
requiring (or contingent upon) substantial economic activity
•
does not provide access to information on shareholding composition,
ownership of goods or rights or the economic transactions carried out.
Thin Capitalization Rules
Article 25 – will only be deductible if the expenses are treated as
necessary for the company´s activities and if the legal requirements
are met
• Expenses that are treated as necessary for the company´ activities
and for the maintenance of its productive source.
• Expenses paid or incurred for the transactions or operations required
for the company’s activities. Accepted operational expenses are those
that are usual and normal for the type of transactions, operations or
activities of the company.
Thin Capitalization Rules
Article 25 – will only be deductible if the expenses are treated as necessary
for the company´s activities and if the following legal requirement is met
• the overall amount of indebtedness with all entities located in a low tax
jurisdiction or in a privileged tax regime is higher than 30% of the net equity
of the Brazilian company.
Thin Capitalization Rules
LuxCo
10%
USCo
CaymanCo
90%
$20
$20
BrCo
Loan LuxCo = 200
Loan CaymanCo = 200
Net Equity = 100
Thin Capitalization Rules
Article 25 – Scope of the restriction
• Funding of all types and terms – exception: pass on transactions by
financial institutions;
• Whether or not the agreement is registered with Central Bank of Brazil;
• Debt transactions in which there is a guarantor (avalista or fiador),
proxy or any intervening party that is a resident or domiciled in a
country or dependency with favorable taxation or subject to privileged
tax regime.
Thin Capitalization Rules
Article 25 – Consequences of excesses
• expenses will not be treated as necessary
• expenses will not be considered deductible for income tax (IRPJ and
CSLL) purposes. Formula to be issued
Expenses in General
Article 26 – Concept
• Expenses for IRPJ and CSLL purposes are not deductible,
• if they derive from payment, credit, delivery, use or remittance at
any title, directly or indirectly,
• to individuals or companies resident or incorporated abroad in
a country or territory with favorable taxation, or subject to a
privileged tax regime.
• Deduction: three tests
Expenses in General
Article 26 – Effective beneficiary
•
The individual or company not incorporated with the sole or principal
purpose of tax savings, that receives payments these values for its
own account and not as agent, trustee or agent on behalf of a third
entity.
•
If the “identification” requirement is met, is the test accomplished?
•
If the recipient located in a country or territory with favorable
taxation is just an agent, but the effective beneficiary is identified,
are the requirements met?
•
How can the “identification” be formalized?
Expenses in General
Article 26 of Law 12,249
Expressions whose content and scope require a specification:
1) "operational ability" - which requirements should be met?
2) "tax savings" - for whom?
3) “tax savings as sole or principal purpose - how to determine?
Transfer Pricing
Transfer pricing — Overview
– Brazilian transfer pricing rules are inconsistent with the internationally accepted
Organization for Economic Co-operation and Development (OECD) guidelines;
– Transfer pricing rules apply to the following related-party transactions:
– Export of goods, services, or rights;
– Import of goods, services, or rights; and
– Interest bearing contracts not registered before the Brazilian
Central Bank (Bacen).
– TP rules do not apply to royalties/technical/scientific and administrative
assistance (special rules apply to those transactions).
Transfer pricing — Comparison
Imports
OECD Equivalent
Exports
PIC
Market comparison - CUP
PVEX
CPL (20%)
Cost Plus method
CAP (15%)
PRL (20%)
PRL (60%)
Resale minus method
PVV (30%)
PVA (15%)
Proposed resale minus method rejected
• The Brazilian Congress failed to approve two provisional measures published late last year
that would have replaced the transfer pricing resale minus method (PRL) with the a new
method, known as PVL from its Portuguese acronym;
• Provisional Measure No. 476/09 (PM 476), published on 24 December 2009, and
Provisional Measure No. 478/09 (PM 478), published on 29 December 2009, were not
approved by the Brazilian Congress within the constitutionally established legal time frame,
and thus lost their effectiveness as of the date of their enactment;
• PM 478 introduced significant changes to Brazilian transfer pricing regulations, revoking
the PRL 20%/60% (the resale minus method), and introduced a new method, known as
PVL 35%. PM 476/09 was known for revoking article 61, II of Provisional Measure No.
472/09, published on 12 December 2009, which in turn revoked the margins on the resale
minus PRL method;
Proposed provisional measures - summary
PM 472
Main change
Enactment
Article 61, II revoked
the transfer pricing
margins of resale
minus method (PLR)
as set forth by article
2 of Law 9,959/00
12/15/2009
PM 476
Revoked article 61, II of
PM 472, and reintroduces
the margins set forth by
article 2 of Law 9,959/00
that were previously
revoked by PM 472
12/24/2009
PM 478
Introduced the
new PVL method
and replaces the
PRL 20%/60%
from January 1,
2010 onwards
12/29/2009
Proposed provisional measures - timeline
PM 472
ENNACTMENT
2009
12/15
PM 476
ENNACTMENT
12/24
PM 478
ENNACTMENT
12/29
2010
PM 476/ PM 478
EFFICACY LOSS
PM 472
CONVERTED INTO LAW
12,249/2010
06/04
06/14
• PM 472 was approved by the Brazilian Congress and converted into Law No.
12,249/2010, published on June 14, 2010;
• The wording of Law 12,249/2010, however, did not include the article that revoked
the transfer pricing margins of the resale minus method as set forth by article 2 of
Law 9,959/00. From that perspective, there is a significant controversy whether the
original provisional measure (which did include the revocation of the transfer pricing
margins) should be in effect in the year of its enactment, that is, 2009;
PRL 20%/60% x (proposed) PVL 35%
PRL 20%
Pure resale
PRL 60%
PVL
35%
All
cases
Imported good
with local value
added
Resale minus method comparative
Description
Applicability
PRL 20%
PRL 60%
PVL 35%
Imported goods or rights
from related parties that
are resold in Brazil.
Applicability of services
only provided by
Normative Instruction,
but not in the Law.
Imported goods,
services. or rights from
related parties resold in
Brazil
Imported goods from
related parties subject to
aggregation value and
resold in Brazil
Statutory margins
20%
60%
35%
Profit margin basis
Gross Resale Price
NRP less aggregation
value in Brazil
Proportional NRP less
proportional CGS
What changes are expected?
• It is expected that the Brazilian tax authorities will try to reintroduce a
“new” resale minus method this year, which would be, in principle, in force
from 2011 if enacted;
• There are also current proposals and discussions with the Brazilian transfer
pricing tax authorities in order to include different sector margins on the
resale minus method, clarify some other uncertainties which where
introduced by Provisional Measure 478, as well as other inconsistencies in
the application of the transfer pricing methods;
Resolution 2,689
Financial Markets
1 - General Rules
• Pursuant to Resolution 2,689, foreign investors are entitled to perform investments in the
Brazilian financial and capital markets by investing in:
 fixed income instruments (bonds, certificates of deposit, debentures);
 derivative instruments (swaps, futures, forwards, flexible options);
 securities (stock, stock options, stock index, warrants);
 mutual funds; and
 other financial instruments generally available to Brazilian residents.
• According to Resolution 2,689, any investor residing outside Brazil shall comply with the
following requirements:
 appointment of an agent (individual or legal entity) in Brazil for the purposes of
representing such investor before third parties (who may or may not be the local
representative for tax purposes) (“Agent”). If this Agent is not a financial institution duly
authorized to operate in Brazil, the foreign investor should appoint a financial institution to
be co-obliged for the compliance of certain obligations that should be observed pursuant
to the applicable regulation with respect to investments performed under Resolution
2,689;
 fulfillment of the application form attached to Resolution 2,689;
 enrollment with the Brazilian Securities Commission (Comissão de Valores Mobiliários –
“CVM”), and the Brazilian Taxpayers’ Registry (Cadastro Nacional de Pessoas Físicas –
“CPF”, or Cadastro Nacional de Pessoas Jurídicas – “CNPJ”, as applicable); and
 registration with the Central Bank of Brazil (“BACEN”).
33
1 - General Rules
• The foreign investor shall enter into a custody agreement with a financial institution
authorized to render such service (pursuant to Article 5, III, of CVM Instruction No. 325).
• Proceeds remitted to Brazil for the purposes of investing in the Brazilian financial and
capital markets under Resolution 2,689 should not be invested in transactions:
 carried out outside stock or commodities exchange, electronic systems or organized overthe-counter (“OTC”) market of securities of publicly-held companies duly registered for
negotiation on such markets; and
 involving securities or financial instruments traded on non-organized OTC markets or on
markets that are organized by entities not authorized by the CVM.
• Such limitations do not include: initial subscriptions, payments of bonuses, conversions of
convertible debentures into shares, indexes referenced in securities, purchases or sales of
quotas of open-ended investment funds and, if previously approved by CVM, delistings,
trading cancellations or suspensions, judicial agreements and the disposition of shares
subject to shareholders’ agreements.
• All proceeds, assets and securities held and traded by foreign investors under Resolution
2,689 should be registered with or deposited in institutions or entities authorized to render
registration and custody services by the BACEN or the CVM or be registered in clearing
systems recognized by the BACEN or by the CVM.
• The transfer and/or assignment of such investments abroad are not allowed, except in
the case of merger, amalgamation, spin-off, corporate reorganization and succession,
34
provided that the regulation issued by the BACEN and the CVM are complied with.
2 - Special Regime for 2689 Investors
• Foreign investors, not located in Low Tax Jurisdictions (“LTJs”), as provided by Brazilian
Law (for further details on LTJs please refer to section 03), that invest in Brazilian financial
and capital markets, pursuant to the rules ser forth by Resolution No. 2,689 (“2,689
Investors”), are subject to a special tax regime in connection with the withholding income
tax (“WHT”) imposed on gains and earnings related to such investment.
• In this sense, capital gains derived upon disposal of shares and other securities, such as
quotas of closed-end investment funds, by the 2,689 Investor performed in the stock
exchange market or an Organized OTC are exempt from withholding tax (“WHT”).
• Further, earnings derived by the 2,689 Investors, generated by the assets composing their
investment portfolio, are subject to:
 WHT at a 10% rate, in relation to investments in variable income investment funds, swap
transactions and transactions in the future market, outside the stock exchange; and
 WHT at a 15% rate in all other cases, including fixed income investments.
• On the inflow of funds to Brazil, in general, the exchange transaction carried out by a
2,689 Investor in order to invest in Brazilian financial and capital markets is currently
subject to the Tax on Exchange Transactions (“IOF/Exchange”) at a 2% rate.
• The exchange transactions carried out for the outflow of funds from Brazil to abroad in
connection with return of capital of 2,689 Investors currently benefits from the zero
percent rate of IOF/Exchange.
35
2 - Special Regime for 2689 Investors
• On the other hand, if the 2,689 Investor resides in a LTJ, the tax regime applicable to it
will be the same regime applicable to Brazilian residents in connection with investments in
Brazilian financial and capital markets.
• Therefore, capital gains derived upon disposal of shares and other securities by the
foreign investor are subject to WHT at a 15% rate. Further, earnings derived by the
foreign investors resident in LTJs, including earnings from fixed income investments and
investments in open-end investment funds are subject to WHT at general rates varying
from 22,5%% to 15%, depending on the type and lifetime of the investment.
• The main tax advantage on the conversion of a 2,689 Investment over a 4131 Investment
is that the foreign investor can benefit from the non-imposition or reduction of the WHT in
future capital gains to the extent that it sells in the future its shares in the Stock Exchange
Market with gains and it is not located in a low tax jurisdiction.
• Please find below the detailed taxation for 2,689 Investor on the following types of
investments:
 Direct investments in shares;
 Fixed income investments;
 Share fund – FIA;
 Private equity fund – FIP; and
 Credit Rights Fund – FIDC.
36
2.1 – Direct Investments in Shares
Tax Aspects
Acquisition
of Shares in
the Stock
Exchange
Market
Foreign
Investor
•
The inflow of funds into Brazil for the acquisition of
shares is subject to the IOF/Exchange which currently
is imposed at a 2%;
•
Dividend and Interest on Equity (“IE”) (which is hybrid
form of dividend distribution provided for in Brazilian
law) paid by the invested company to the Foreign
Investor, as well as the repatriation of the invested
capital, is currently subject to IOF/Exchange at a 0%
rate.
•
Dividends paid by the invested company are not
subject to WHT;
•
IE paid by the invested company is subject to WHT at a
15% rate, provided that the Foreign Investor (as a
2689 Investor) not located in a LTJ (if located in a LTJ,
a 25% rate applies);
•
Capital gains recognized upon the disposal of shares
are not subject to WHT, in the event the Foreign
Investor is not located in a LTJ or at a 15% rate, if the
Foreign Investor is located in a LTJ.
Abroad
Brazil
Publicly Held
Corporation
37
2.2 – Fixed Income Investments
Tax Aspects
Acquisition
of Bonds or
other fixed
income
instruments
Foreign
Investor
•
The inflow of funds into Brazil for the acquisition of
shares is subject to the IOF/Exchange which currently
is imposed at a 2%;
•
The outflow of the investment, including gains and
earnings, will be subject to IOF/Exchange at a 0% rate;
•
Earning derived by the Foreign Investor in connection
with the fixed income investment will be subject to
WHT at a 15% rate, provided that such investor is not
located in a LTJ;
•
If the investor is located in a LTJ, the WHT would be
imposed at rates varying from 22.5% to 15%,
depending on the lifetime of the investment.
Abroad
Brazil
Fixed Income
Investments
38
2.3 – Share Fund - FIA
Tax Aspects
Subcription
/Acquisition
of Quotas
of a FIA
Foreign
Investor
•
The inflow of funds into Brazil for the acquisition or
subscription of quotas is subject to IOF/Exchange at a
2% rate.
•
The outflow of the investment, including gains and
earnings, in connection with the Share Fund will be
subject to IOF/Exchange at a 0% rate.
•
If the Foreign Investor is located outside a LTJ, gains
recognized upon disposal of the quotas of closed end
funds in the stock exchange market or an Organized
OTC are exempt of WHT.
•
If the Foreign Investor is located in a LTJ, such gains
would be subject to WHT at a 15% rate.
•
Earnings to be received by the Foreign Investor would
be subject to WHT at a 10% rate.
•
In the event the Foreign Investor is located in a LTJ,
such earnings would be subject to WHT at a 15%.
Abroad
Brazil
FIA
39
2.4 – Private Equity Fund - FIP
Tax Aspects
Subcription
/Acquisition
of Quotas
of a FIP
Foreign
Investor
•
The inflow of funds into Brazil for the acquisition or
subscription of quotas is subject to IOF/Exchange at a
2% rate.
•
The outflow of gains and earnings in connection with
the FIP will be subject to IOF/Exchange at a 0% rate.
•
If the quotaholders are located outside of a LTJ, gains
and earnings recognized by the 2.689 Investor as a
result of the amortization of quotas of the FIP will be
subject to the imposition of the WHT at a 0% (zero
percent) rate.
•
This 0% WHT rate would not apply if (i) the foreign
quotaholder holds (directly or via related parties) at
least 40% of the quotas of the FIP or of the quotas
that represent the right to receive more than 40% of
the earnings of the FIP; (ii) the FIP has, at any time,
debt bonds corresponding to more than 5% of its net
worth, or (iii) the foreign investor is domiciled in a LTJ.
•
If the 2689 Investor is resident in a LTJ, it will be
subject to the same tax treatment applicable to
Brazilian investors;
Abroad
Brazil
FIP
40
2.4 – Private Equity Fund - FIP
Tax Aspects (cont.)
Subcription
/Acquisition
of Quotas
of a FIP
Foreign
Investor
Abroad
Brazil
FIP
•
Therefore, gains and earnings recognized by
quotaholders of the FIP would only be taxable on the
sale or amortization of the corresponding quotas. In
this context, those gains and earnings would be subject
to the imposition of the WHT at a 15% rate.
•
Such tax treatment is conditioned upon fulfilment of
the following requirements: (i) the portfolio of the FIP
must be composed by at least 67% of shares of
corporations (S.A.), convertible debentures and
subscription bonds, and (ii) diversification limits and
rules provided for in the regulations of CVM must be
observed. If these two requirements were not met,
gains and earnings recognized by quotaholders would
be subject to WHT at aggregate rates varying from
22.5% to 15%, depending on the lifetime of the
investment in the FIP.
41
2.5 – Credit Rights Fund – FIDC
Tax Aspects
Subcription
/Acquisition
of Quotas
of a FIDC
Foreign
Investor
Abroad
Brazil
•
The inflow of funds into Brazil for the acquisition or
subscription of quotas is subject to IOF/Exchange at a
2% rate.
•
The outflow of the investment, including gains and
earnings, in connection with the FIDC will be subject to
IOF/Exchange at a 0% rate.
•
If the Foreign Investor is located outside a LTJ, gains
recognized upon disposal of the quotas of closed-end
funds in the stock exchange market or an Organized
OTC are exempt of WHT.
•
If the Foreign Investor is located in a LTJ, such gains
would be subject to WHT at a 15% rate.
•
Earnings to be received by the Foreign Investor upon
redemption or amortization of quotas would be subject
to WHT at a 15% rate, in the event such investor is not
located in a LTJ.
•
In the event the Foreign Investor is located in a LTJ,
such earnings would be subject to WHT at rates
varying from 22,5% to 15%, depending on the lifetime
of the investment.
•
It is important to mention that the same tax treatment
described above is applicable to Multimarket Funds.
42
FIDC
3 - Comments on the Concept of Low Tax
Jurisdictions and Privileged Tax Regimes
•
Until December 2008, under Brazilian tax law, a LTJ was a country or location that does not
impose taxation on income, or imposes the income tax at a rate lower than 20% or where the
laws of that country or location impose restrictions on the disclosure of shareholding
composition or the ownership of the investment. There was a list of LTJ enacted by the
Brazilian Revenue Service by means of Normative Instruction 188/2002. More recently, some
amendments were implemented in connection with the concept of LTJ, via Law 11,727/08, in
force as of January 2009, in order to include in said concept the provision in the sense that the
country or location which imposes restrictions on the disclosure of shareholding composition or
the ownership of the investment should also be considered as a LTJ. Additionally, Law
11,727/08 also created the concept of “privileged tax regimes”.
•
In 2010, a new list was enacted by the Brazilian Revenue Service, via Normative Instruction
1,037/10 (“IN 1,037/10”), which included both the countries considered as LTJs and the
locations considered as granting privileged tax regimes (“PTR”).
•
In our view, there are solid legal grounds to sustain that the list should be interpreted as a
comprehensive list, so that only the countries and locations listed should be viewed as LTJs and
privileged tax regimes, according to their specific qualification. Further, in our opinion, there are
solid legal grounds to sustain that the concept of privileged tax regime only applies for the
purposes of transfer pricing rules and thin capitalization rules.
•
Please find below the countries included in the new list.
3 - Comments on the Concept of Low Tax
Jurisdictions and Privileged Tax Regimes
•
Andorra, Anguilla, Antigua and Barbuda, Dutch Antilles, Aruba, Ascension Island, Bahamas,
Bahrain, Barbados, Belize, Bermudas, Brunei, Campione D’Italia, Canal Island (Jersey,
Guernsey, Alderney and Sark), Cayman Island, Cyprus, Singapore, Cook Island, Costa Rica,
Djibouti, Dominica, United Arab Emirates, Gibraltar, Grenada, Hong Kong, Kiribati, Lebuan,
Liban, Liberia, Liechtenstein, Macau, Madeira Island, Maldives, Man Island, Marshall Island,
Mauricio Island, Monaco, Montserrat Island, Nauru, Niue Island, Norfolk Island, Sultanate of
Oman, Panama, Pitcairn Islands, French Polynesia, Queshm Island, San Cristovan and Nevis,
American Samoa, West Samoa, San Marino, Saint Helena Island, St. Peter and Miguelão Island,
Saint Vincent, Santa Lucia, Seychelles, St. Kitts and Nevis, Solomon Islands, Swaziland,
Switzerland, Tonga, Turks and Caicos Islands, Vanuatu, American Virgin Islands, British Virgin
Island and Tristan da Cunha.
• According to IN 1,037/10 are PTRs:
in what concerns the legislation of Luxembourg, the regime applicable to the holding
companies;
in reference to the Uruguayan legislation, the regime applicable to the Financial
Investment Companies (“Safis”), until December 31st, 2010;
in respect with the legislation of Denmark, the regime applicable to the holding companies
which do not develop substantial economic activity;
regarding the Netherlands legislation, the regime applicable to the holding companies
which do not develop substantial economic activity;
in relation with the legislation of Iceland, the regime applicable to the International
Trading Companies (“ITC”);
3 - Comments on the Concept of Low Tax
Jurisdictions and Privileged Tax Regimes
in reference to the Hungarian legislation, the regime applicable to the companies
incorporated as KFT offshore;
in what concerns the legislation of the United States of America, the regime applicable to
the companies incorporated as state Limited Liability Company (“LLC”), whose
shareholding control is composed of non-residents, not subject to the federal income tax;
regarding the Spanish legislation, the regime applicable to the companies incorporated as
Entidad de Tenencia de Valores Extranjeros (“E.T.V.Es”), and
in connection with the legislation of Malta, the regime applicable to the International
Trading Companies (ITC) and the International Holding Companies (IHC).
• On June 23rd, 2010, was enacted Normative Instruction n°. 1,045, which altered IN 1,037/10.
According to IN 1,045, the jurisdictions mentioned on sections 1 and 2 of IN 1,037/10 may file
a request for revision of its characterization as LTJ or PTR. This request shall be forward by a
representative of the countries’ government and shall be addressed to the BIRS Secretary. It
shall be accompanied by proof of the content and effectiveness of tax legislation, which enables
to review the classification. This request may grant suspensive effects in relation to the tax
impacts involving the requestor jurisdiction, at the BIRS Secretary discretion.
• On June 25th, 2010 were published Normative Acts 10 and 11, which declare that Switzerland
and Netherlands have filed the referred request. During the analysis of the request, the force of
the list on these two countries has been suspended. As this procedure is new, we are not able
to inform how long will it take to BIRS to issue a conclusion on the matter.
4 – Recent Challenges: 2,689 Investor
included in LTJ by IN 1,037
• According to abovementioned new list, were added to the LTJ roll: Ascension Island, Brunei,
Kiribati, Norfolk Island, Pitcairn Islands, French Polynesia, Queshm Island, Saint Helena Island,
St. Peter and Miguelão Island, Solomon Islands, St. Kitts and Nevis, Swaziland, Switzerland and
Tristan da Cunha.
• Therefore, it is possible that a 2,689 Investor, that was not incorporated in a LTJ before, due to
the enactment of IN 1,037 list, now its considered to be located in a country deemed to be a
LTJ by the Brazilian Tax Authorities.
• In light of the issue presented above, the following solutions are feasible :
 Liquidation of the assets. The investor would liquidated the current assets and then reinvest in
Brazil as a 4,131 Investor. In this case, the rate increase is not avoided, but it limits the costs to
past operations. An alternative that can be implemented in relation to this one is withdraw of
the investments, transfer of the assets abroad to a country which is not considered a LTJ and
then, after the transfer is completed, reinvest from the other country;
 Merger, amalgamation, spin-off, corporate reorganization and succession abroad;
 Drop-down of the 2,689 Investments, as this operation is considered by the CVM as a corporate
reorganization abroad (past CVM rulings were in this sense); and
 Change of the company’s location abroad. It is important to bear in mind that the entity must
remain the same, despite of the change of location.