The Carbon Credit Markets are hot, since investors are currently considering a new set of standards: Environmental, Social, and Governance criteria, known by “ESG”. As many Brazilian companies are trading carbon credits and decarbonization credits, it is essential to take main tax aspects into account.
The carbon credits are generated and sold by Brazilian companies whose activities reduce, avoid or destroy carbon dioxide or other Greenhouse Gases (GHGs), through Certified Emission Reductions (CERs). And the foreign company or investor that buys carbon credits from Brazil has tax benefits.
According to the “Brazilian Internal Revenue Service” (Receita Federal), this purchase agreement is an assignment of credits. So, the revenue deriving from the carbon credit sale will be taxed under Corporate Income Tax (known as “IRPJ”) and Social Contribution Tax (known as “CSLL”), according to the company’s method of calculation (actual or deemed income). There is no specific rate. Therefore, the general rule stands and the total effective tax rate on corporate profits is 34%.
If the carbon credit buyer is a Brazilian company, Social Integration Program (PIS) tax and the Social Security Financing Contribution (COFINS), at a combined rate of 9.25%, will be also levied, according to the company’s tax system (cumulative or non-cumulative). On the other hand, if a foreign company purchases it, the revenue deriving from the exportation of these assets is exempt of these taxes, which represents a significant advantage of 9.25%.
The market is heating up. Besides the tax considerations about the credits, it is also important to the foreign investor or company to verify the best legal structure to set up the whole business.