Cost sharing agreements are widely used by international conglomerates doing business in Brazil.
A recent court precedent in Federal Administrative Tax Court ruled that payments from Brazilian subsidiaries to parent companies sitting abroad related to cost sharing agreements are subject to withholding income tax of 15% or 25% depending on the service.
What call the attention is that such administrative court decision ignored the contract terms and conditions simply considered that a mere remittance of money in exchange for service generates the payment of income tax.
In contrast, Brazilian tax authority (the Brazil’s IRS) has a position that income tax is not due as long as the cost sharing agreement respects certain requirements, such as (i) refers to support activities; (ii) the payment is made to cover the costs only, without adding profit margin; (iii) the services are provided through a common economic group structure; (iv) the services are not provided for limited time; and (v) represent a mutual benefit between companies of same economic group.
The above evidences the importace for business conglomerates doing business in Brazil to be carefully with respect to requirements of cost sharing agreements, in order to avoid tax costs or penalties.
