The internationalization process of Brazilian companies, especially through the acquisition of subsidiaries or affiliates abroad, involves strategic gains, access to new markets, and diversification of assets.
However, it conceals significant challenges in tax matters, especially regarding the transfer of profits and dividends from these subsidiaries to the parent company in Brazil. The topic has gained importance with recent changes in Brazilian regulations, particularly after Law No. 14,596/2023, which altered procedures for international taxation, transfer pricing, and the calculation of profits earned abroad. Not infrequently, managers and board members face complex obstacles such as tax burden, double taxation, and limitation of tax credits.
Below, we list five key points to guide safer and more efficient decision-making in this context.
1. Limits and Rules for Tax Offset Paid Abroad: The main mechanism to avoid double taxation is the offset, in Brazil, of the income tax paid abroad, usually the federal corporate tax in that country. However, the offset has strict requirements: it is only accepted up to the limit of IRPJ/CSLL due in Brazil on the same profit, and only for taxes imposed directly on the subsidiary’s profit. Other levies, such as taxes on remitted dividends (“withholding tax”) or state/local taxes, are typically not eligible for offset. This means, in practice, a substantial portion of the tax paid abroad cannot be deducted from Brazilian taxes, increasing the group’s overall tax burden.
2. Double Taxation on Dividend Distribution: When remitting dividends from a foreign subsidiary to Brazil, there is often withholding tax in the country of origin (withholding tax), for example, 30% in the U.S. for Brazil, due to the lack of a double taxation treaty between both countries. Brazilian law does not allow for this tax amount to be offset in the calculation of the parent company’s IRPJ/CSLL, since it is levied on the remittance/dividend, not on the profit earned. The practical result is double taxation: the subsidiary pays tax on the profit, and, upon distributing dividends, is subject to a second layer of taxation, without the Brazilian parent being able to offset the entire amount effectively spent.
3. Recent Legislative Changes (Earned Profit vs. Distributed Profit): Since Law No. 14,596/2023, Brazil has adopted the “earned” profit taxation regime, under which the Brazilian parent must tax the profit of its foreign subsidiaries/affiliates regardless of dividend distribution, in other words, even if the resources remain retained abroad. This increases the speed at which tax becomes due in Brazil and requires business groups to carefully assess the timing and method of remitting profits, as taxation is no longer tied to the actual inflow of funds.
4. International Structures and Tax Planning: Using intermediary countries with agreements to avoid double taxation or lower withholding tax rates, such as the Netherlands and Luxembourg, has long been a common solution. However, Brazilian tax authorities have been tightening the treatment of artificial structures or holdings lacking substance, applying the “beneficial owner” rule to disregard planning aimed solely at tax benefits. Therefore, any planning must be backed by real operations, including personnel, assets, risks, and managed functions, on pain of disqualification and severe tax assessments.
5. Possibilities for Reducing Double Taxation: Despite the obstacles and increasingly strict oversight, there are mechanisms available to mitigate double taxation: (i) opting to retain profits abroad, thus deferring their distribution and the corresponding withholding tax; (ii) structuring remittances through legitimate loan, service, or royalty agreements, provided they meet effectiveness and transfer pricing requirements; (iii) exploring distribution planning strategies for fiscally and currency-favorable periods. On the other hand, although legitimate, if these alternatives are poorly implemented, they expose the group to reputational risks, tax assessments, and unforeseen costs.
The repatriation of profits and dividends by Brazilian parent companies requires highly specialized planning. Complexity arises not only from national legislation but from the combination of different country tax regimes, the treaties in place (if any), and the heightened scrutiny of global tax authorities in cracking down on artificial arrangements. A careful assessment of each scenario, along with robust documentary evidence and transparency in international relations, is essential to ensure that global growth translates into real value for the Brazilian group, with the lowest possible tax cost and within compliance boundaries.
