The Brazilian tax chaos is based on the high number of tax regulations which further obstruct the already cloudy legal situation. According to the Chamber of Commerce in São Paulo an average of 35 new tax regulations are being issued every day. In total, Brazilians work 181 days annually only to pay taxes which equals a tax burden of 68,3% including labor costs – which is no surprise given the 90 types of taxes and contributions that are in place.
This article focusses on tax regulations that are most relevant to German or German speaking companies. It explains the legal bases for the most important sources of income, offers advise on how to avoid double taxation whereas a double taxation treaty between Germany and Brazil is missing, and last but not least, provides a short overview of current tax conflicts. The information provided in this summary stem from the Chamber of Commerce`s Publication „So geht`s im Internationalen Steuerrecht Brasilien (zu)“.
Legal Tax Base
In contrast to Germany, all of Brazil`s three territorial authorities (Federation, Federal States, Municipalities) have legislative, administrative and revenue powers. This means, that in Brazil, the State as well as the 27 Federal States and another 5.000 municipalities can raise their own taxes! This is what causes the proverbial tax jungle which is being further compressed by means of the “provision measure with legal force”. This measure is a presidential instrument that enables him/her to introduce taxes with an immediate effect in cases of “relevant or time-sensitive situations”.
The most important legal bases for taxation are the Brazilian Tax law (CTN, 25.10.1966) as well as the Brazilian Constitution which allows the three territorial authorities to collect taxes, fees and added value fees. Additionally, forced loans, special contributions and social security contributions can be collected which are further explained in the following table:
|Social security Contributions
|To cover extraordinary costs caused by public emergency, war or public investments of urgent character||Social security contributions
Contributions for the public intervention in the economy „CIDE“
Contributions in the interest of professional or economic actors (unions)
|Contributions by the employer (PIS/COFINS/CSLL)
Contributions by the employee
Contributions from the lottery
Contributions PIS and COFINS by the importer of goods and services
In theory, there is a tax rules that states that fees or contributions cannot have the same basis of assessment as taxes in order to not lead to double taxation. In practice, a number of tax conflicts arose based on this premise which will be outlined later on. Apart from this principle, the Brazilian Constitution follows the following tax principles, similar to the German ones:
- Principle of legality
- Principle of equal treatment
- Principle of annuity
- Prohibition of expropriation
- Prohibition of the limitation of the movement of people and goods by collecting fees between federal states or municipalities
Distribution of Tax Credits among the Territorial Authorities
|· Import tax
· Export tax
· Income tax for legal and natural entities
· Tax on industrial goods
· Tax on credit, insurance, currency and financial operations
· Property tax on rural properties
· Tax on big assets (not yet implemented)
|· Tax on transmission of objects and rights in case of death or gifting
· Tax on movement of goods, inter-state and municipal transport and communication services
· Vehicle tax
|· Property and building tax in urban areas
· Tax on paid transmission of real estate and object rights
International Tax Law & Double Taxation Treaties
With view to external taxation, Brazil follows the internationally accepted world income principle for direct taxes and the destination principle for indirect taxes. This means that companies residing in Brazil do not only have to pay taxes on their profits generate din Brazil but all other profits worldwide unless a double taxation agreements exists. Since this is not the case for Germany anymore since 2005, a company can avoid double taxation either through exemption or crediting.
In case of the exemption method, all international revenues will wither be partially or fully exempted from the domestic income tax (in Germany subject to the progression clause). Thus, the higher tax rate will not be used for the profits generated in Brazil.
The crediting method inly functions under reciprocity. Here, a company proves to the Brazilian state that it has paid its taxes in Germany/abroad in order to only be taxed for the profits generated in Brazil.
Until a new double taxation agreement between Germany and Brazil will be negotiated, companies can form subsidiaries in countries with double taxation treaties (so-called “legitimate treaty shopping”).
Income Tax, Social Security and Special Contributions
In contrast to Germany, all corporate forms (including sole traders) are treated as legal entities in terms of income taxation and they are all subject to the world income principle. The following income tax responsibilities accrue from this situation:
- net profit will be taxes monthly, quarterly or yearly with 15%
- > 20.000 Reais monthly à additional 10% on surplus revenue
- + contribution on net amount (CSLL) of 9%
- à total tax burden 24-24%
Special rules exist for companies with limited expenses and high profits as well as for micro and small businesses. Um to a monthly revenue of 4.000.000,00 Reais the former can used the “generalized profit” method (lucro presumido) which leads to sector specific taxation of the net revenue between 8-32%. The latter fall under the “Simples Nacional” regulation which subsumes nine different taxes for all three territorial authorities and gives presence to the respective companies during public procurement processes.
Social security and special contributions will be collected on payments to employees, a company`s profits and the import of goods and services. The most important examples are summarizes in the following table:
|CSLL||CIDE*||PIS und COFINS**|
|9% contribution on the net profit of a company||Contribution on the intervention of the economic sector
10% on the compensation of brand and patent licenses, technology transfer, technical and other services
|Contributions on the revenue of PIS/COFINS
*Discrimination of the Federation versus the Federal States and double taxation treaty partners through treaty infringing additional tax burdens
** additional tax burdens given the already existing consumption taxes IPI, ICMS und ISS
Taxation of the most important Types of Income
The withholding taxes that are most relevant to companies operating in Brazil are those on interest rates, technical payments and licenses, other services and capital gains. The following table summarizes the key points:
|License fees, technical payments, technical services||Other non-technical services
with CIDE totaling a tax burden of 25%
|Settlement tax of 15%
For immovable property the country where the property is located has the right to tax
Current Judicial Tax Conflicts
Certain practices of the Brazilian taxation process are considered unconstitutional or judicially “unsound”. This is true for the taxation of technical services, transfer pricing and the CFC legislation.
Taxation of Technical Services
In principle, the municipalities have the sole right to tax services. Since companies that also reside abroad are already paying ISS and/or ICMS taxes the Federation is using the same assessment basis (gross earnings) for this withholding tax which results in an unconstitutional double taxation. Using CIDE, PIS and COFINS (10%, 1,65%, 7,6%) can be critiqued using the same logic. In sum, this unconstitutional tax burden constitutes 34,25%. Currently, companies can only use preventive legal action (mandado de segurança) to address the situation.
Currently, a disputed tax regulation is in place in Brazil that introduced a new method for calculating transfer prices. The method resulted in an increase of the assessment basis for the corporate income tax IRPJ and social contributions on net profits (CSLL) which automatically increased the payable taxes and contributions. Most companies react to the new regulation by ignoring it while adhering to the calculation practice anchored in tax law.
The objective of the CFC legislation is to tax subsidiaries or associated companies abroad in a manner that stops abusive tax planning or tax evasion using offshore companies in tax havens. In line with that goal, a presidential Provisional Measure Nr. 2.1.58 has been introduced which enables the fictitious and premature taxation of subsidiaries belonging to Brazilian companies. The practice of fictitious taxation is not only prohibited but is also lacking any practical and realistic assessment basis.