Corporate groups can centralize the costs of common services (intermediate activities) among them in a single company of the group and then share the costs – this arrangement can be structured under a cost sharing agreement.
It is essential to consider, when drafting and performing the contract, that the tax burden over the reimbursements by other companies to the centralizing member can vary significantly in Brazil.
The “Brazilian IRS” (Receita Federal do Brasil) has already analyzed and established some aspects to be considered of domestic cost sharing agreements (Brazilian corporate groups) over the years. There are three key points to highlight:
1. Definition: a cost sharing agreement for tax purposes is the contract that conveys an operating structure created to centralized expenses in a centralizing member of the corporate group, without any profit margin or revenue markup on the amounts transferred, and, afterward, share costs within the group for the only purpose of economic efficiency. It is not to be confused with intragroup services nor contribution to costs between companies within the same corporate group.
2. Requirements to constitute reimbursement of expenses by cost sharing agreement (and not revenue, profit, price): (a) goods and services proven to be received and effectively paid; (b) necessary, usual and normal expenses to the activities of the companies (not eventual expenses); (c) the expenses apportionment being made must be according to reasonable and objective criteria, previously adjusted, formalized by an instrument signed between the companies (written contract); (d) the apportionment criteria must correspond to the actual expenses of each company and consider the global price paid for the goods and services, according to proper bookkeeping; (e) the centralizing company can only consider “expenses” the portion that fits the apportionment criteria (as well as other member companies benefiting from the agreement), indicating the amounts to be reimbursed as a recoverable credit in the bookkeeping; (f) the member companies must keep separate bookkeeping of all acts directly related to the apportionment of the expenses; (g) there can be no profit margin or revenue markup on the amounts transferred (reimbursements); (h) the amounts cannot constitute payment for services provided by the centralizing company.
3. Non-taxation of reimbursements: if the above requirements are met, the amounts related to the cost sharing agreements received by the centralizing member from other members of the corporate group are considered just reimbursements. So, there will be no taxation over this transfers by Corporate Tax (IRPJ) and Social Contribution on Profits (CSLL), nor by Social Security Contributions on Gross Revenue (PIS and COFINS).
From a tax efficiency point of view, it is essential to strictly observe the criteria established by the Brazilian IRS when stablishing a cost share agreement structure, performing the contract and doing the bookkeeping.
The tax and, consequently, financial impacts are enormous, depending on whether transfers are characterized as simple reimbursement of costs from a cost sharing agreement or not.