Tax | COP26 Summit and Taxation on Carbon Markets in Brazil

The COP26 Summit has the carbon market as one of its hot topics.

Considering the ESG standards are growing in importance in Brazil, find below key tax points on two green bonds in Brazil: 

1. Certified Emission Reductions (CERs): 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). 

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. 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%.  

2. Decarbonization Credits (“CBIO”): CBIO is a credit that is equivalent to 1 ton of CO2 avoided, issued by certified biofuels producers and importers according to their purchase and sale invoices. Biofuels producers and importers can generate income issuing CBIO and forwarding it to B3 – Brazil Stock Exchange, through a bank or other financial institution (an underwriter). 

There are tax benefits for both producers and investors: the income resulting from the CBIO operations will be subject to a 15% Withholding Income Tax. Therefore, the income/revenue will not be taxed under Corporate Income Tax (known as “IRPJ”) and Social Contribution Tax (known as “CSLL”), that together represent an effective tax rate on corporate profits of 34%. 

Besides, for companies taxed under the actual income calculation basis, it is allowed to deduct expenses with administrative or financial costs involved in the issuance, register and trading of the CBIO, including the ones related to the underwriter. Nevertheless, possible losses in the operations involving CBIO are not allowed as deductible expenses.  Fossil fuel distributors, which are potential buyers, do not have these tax benefits.  However, all the other investors that can have access to the bonds can be benefited by the tax incentives above. 

The Green Bond Market is heating up and COP26 tends to draw even more attention to the topic. 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.


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