Brazil has a tough tax legislation regarding “tax havens”, which are countries or regions deemed with favored taxation or privileged tax regimes (which do not tax income or tax it at a maximum rate of less than 20%).
Brazilian tax authorities periodically review the list of tax havens, which now includes, among others, the BVI, Cayman Island, Hong Kong, United Arab Emirates, Ireland, the regime applicable to legal entities constituted in the form of International Trading Company (ITC) regarding Iceland, the regime applicable to legal entities constituted in the form of state Limited Liability Company (LLC) whose participation is composed of non-residents, not subject to federal income tax regarding US.
Some situations with different impacts are as follows:
1. Royalties and technical service remittances are subject in general to 15% withholding tax, but it is increased to 25% if the payment is made to tax haven’s jurisdictions.
2. The remittance of capital gains abroad on the sale of shares, quotas or assets are subject of a 25% withholding tax if the beneficiary is located in a tax haven jurisdiction, instead of a rate that can vary from 15% to 22,5% in other cases.
3. The Transfer Pricing Rules are applied to transactions with foreign parties located in jurisdictions considered to be tax havens, regardless of whether or not there is an equity relationship between them, in other words, regardless if the parties are actually related, as generally considered.
4. Interest on loans are subject to a withholding tax of 25% when the beneficiaries are located in tax havens, instead of a rate of 15% for other jurisdictions.
5. Payments made to tax haven jurisdictions are only deductible for Brazilian income tax if some conditions are met: (a) the identification of the effective beneficiary abroad; (b) the proof of the operational capacity of the foreign entity; and (c) the proof, by the adequate documentation, of the payments and of the corresponding supply of goods, rights or provision of services.