Tax | Taxation of Exchange Variation on Investments Abroad

Social security contributions on gross revenue (PIS/COFINS) are levied on the positive exchange rate variation recorded in the sale of investment abroad by a Brazilian company. Such taxes are levied even if it is only a matter of reducing the share capital. This is the Federal Revenue’s understanding in a recent pronouncement. On the other hand, the Corporate Tax on Income (IRPJ) and the Social Security Contribution on Profits (CSLL) are not due on the same investments. 

The tax authority considered that monetary variations based on the exchange rate are considered financial income and should be included in the basis for calculating PIS/COFINS contributions. 

This decision affects the investments of Brazilian multinational companies and may generate new forms of structuring. Or even generate discussions in the Brazilian courts seeking to remove this tax. 

This is because, in the PIS/COFINS contribution legislation, the positive result of the investment valuation at the equity value is expressly excluded from taxation. And so, the positive exchange rate variation resulting from these same investments should not be taxed either, as it would be a kind of extension of the investments themselves. It would have the same nature. 

It is the same logic of the understanding of judicial jurisprudence that the exchange variation in exports is also out of the reach of  PIS/COFINS, considering that export revenues are not affected by taxation. In other words, if the export revenue is not taxed, the positive exchange rate variation resulting from these export earnings cannot be taxed either. 

In this sense, the classification used by the Federal Revenue Service that the exchange variation would be only financial income, unrelated to its origin, and always taxed would be wrong. 

Therefore, it is up to the companies to verify what is the best way to seek their rights to avoid such taxation.

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