Taxes and contributions in Brazil
Corporate Income Taxes (IRPJ and CSLL)
Resident companies are taxed on worldwide income. A foreign company is subject to Brazilian taxation only if it carries out certain sales activities in Brazil through agents or representatives that are domiciled in the country and that have the authority legally to bind the foreign seller before the domestic purchaser, or through a domestic branch of the foreign seller. A representative acting as an agent, with the final transaction being concluded by the non-resident company abroad, will not give rise to a legal presence in Brazil.
Corporate income tax, or IRPJ, is levied on the taxable profits of an entity at a rate of 15%. In addition to the IRPJ, a 10% surtax is imposed on taxable income exceeding BRL 240,000 on an annual basis.
The social contribution on profits, or CSLL, is levied on entities subject to the IRPJ in order to finance the Brazilian federal social security system. According to Law 13,169/2015, the CSLL rate was increased to 20% for financial institutions and remains at a 9% for other institutions.
Corporate income taxes are self-assessed and returns must be filed in the taxpayer's place of domicile. The authorities may assess taxes if no return is filed, or the taxpayer files an incorrect return. In situations when proper accounting records have not been kept by the taxpayer tax authorities may disregard the accounting records and conduct an arbitrary assessment.
Law 13,202/15, published on 9 December 2015, clarified that Brazil's tax treaties also cover the social contribution on net profits (CSLL). The "taxes covered" article in Brazil's tax treaties expressly includes only "Brazilian federal income tax," without specifying or making a reference to the IRPJ or the CSLL.
Taxable income defined
Operating profits are defined as gross operating receipts, less the cost of goods sold or services rendered; commercial, administrative and operating expenses; and other charges, reserves and losses authorized by law. Dividends received from other Brazilian companies and income from premiums on the issuance of new shares is not included in taxable income.
Brazilian companies may elect to be taxed on actual or deemed income. The Lucro Real method is based on actual annual or quarterly taxable income, and the Lucro Presumido method is based on estimated or deemed taxable income. The election is made annually and documented by the first tax form paid at the beginning of each calendar year.
Under the Lucro Real system, tax base is income before IRPJ and CSLL, adjusted by add-backs (nondeductible expenses) and deductions (nontaxable income, such as dividend income). IRPJ and CSLL must be paid by the last business day of the following month.
- Lucro Real (Actual Income Regim)
Legal entities taxed under the actual income method computed on an annually or quarterly basis determine taxable income based on pretax income adjusted by add-backs and nontaxable items. The election of the actual income method is mandatory for any entity that meets the following conditions:
- Total revenues in the previous calendar year exceeding seventy-eight million Reais (R$78,000,000.00) or proportional to the number of months during which the entity was operating in a given fiscal year, if shorter than twelve (12) months;
- Financial institutions, insurance companies, and other similar financial entities;
- Entities that have income, profits or capital gains from foreign sources;
- Entities that are granted tax incentives involving exemption from or reduction of income tax;
- Entities that (during the course of the calendar year) made monthly tax payments based on the estimated system;
- Entities engaged in factoring activities. The actual income method allows the taxpayer to calculate the income tax on a quarterly basis or on an annual basis.
Once the annual income regime method is elected, the taxpayer is required to perform monthly prepayments of IRPJ and CSLL, which reduce the final tax liability at December 31.
- Lucro presumido
he deemed taxable income system (Lucro Presumido) is an optional tax regime for companies whose gross revenue in the previous year was less than BRL 78 million and is calculated on a quarterly basis. The IRPJ and the CSLL are levied on deemed profits, which are determined by applying a specific percentage to the revenue of each quarter, plus other income and capital gains earned.
For the IRPJ, the taxable income is determined by applying generally the following ratios: 32 percent for services revenue and 8 percent for revenue from sales of products and goods (these ratios may differ for specific activities). For payment of the CSLL, the estimated profit margin is 32 percent for services and 12 percent for sales of products and good. The IRPJ and the CSLL must be paid quarterly, by the last business day of the month following the quarter.
Companies that have an integrated costing system must value inventory for tax purposes at the lower of cost and market value, using either the average cost or the first in, first out (FIFO) method. In general, companies that do not have an integrated costing system must value products at 70% of the highest sale price used in the tax period (arbitrary method).
Losses must be segregated as "operating" and "non-operating." Non-operating losses may only be set off against non-operating gains. Tax losses incurred in one fiscal year may be carried forward indefinitely but the amount offset is limited to 30 percent of taxable income for each year. The carryback of losses is not allowed
Brazil does not have a group relief system. There is no tax consolidation in Brazil and each entity must file separate tax returns.
Capital gains taxation
Capital gains are treated the same as ordinary profits (subject to restrictions on the offset of capital losses against ordinary profits in certain cases). Capital gains derived by a nonresident on an investment registered with the central bank are subject to a 15 percent withholding tax. If the capital gain is derived by a tax haven resident, the rate is increased to 25 percent. According to domestic Law, the legal representative in Brazil of the non-resident buyer is liable for withholding and paying the tax to the Brazilian tax Authorities. In essence, this rule intends to tax any capital gain generated abroad, on transactions involving the transfer of ownership of a Brazilian investment, between companies/ individuals that are nonresident in Brazil.
Provisional Measure No. 692/2015 (PM 692) was converted into Law 13,259/2016 and published in Brazil’s official gazette on 17 March 2016, almost six months after its enactment in September 2015. Law 13,259/2016 contains changes to the capital gains tax rules originally included in PM 692.
PM 692 revised the income tax rates applicable to capital gains derived from the sale of assets by individuals from a flat rate of 15% to progressive rates ranging from 15% to 30%. The changes in the PM also affected the rates applicable to capital gains derived from certain sales of “non-circulating” assets (a term used in IFRS nomenclature) by legal entities. Law 13,259/2016 further revises the progressive rates, to a range from 15% to 22.5%, as follows:
- 15% on gains that do not exceed BRL 5 million;
- 17.5% on gains over BRL 5 million and below BRL 10 million;
- 20% on gains over BRL 10 million and below BRL 30 million;
- and 22.5% on gains over BRL 30 million.
Law 13,259/2016 states that it is effective retroactively as from 1 January 2016, however, any law that increases taxes should enter into effect only in the year following the year of enactment. Therefore, in practice, the changes should apply as from 1 January 2017
Foreign investors on the financial market may be subject to different capital gain tax rates.
Expenses generally may be deducted if they are necessary for the activities of the company. Exchange gains and losses on obligations in foreign currencies may be taxed on an accrual or cash basis, according to the taxpayer'selection for the calendar year. Under the accrual basis, monthly exchange gains will be taxable and exchange losses will be deductible (whether or not realized). Under the cash basis, exchange gains or losses will be taxable or deductible only when realized.
After the introduction of the new IFRS rules, Brazilian companies are subject, as from January 1, 2008, to Tangible/FixedAsset's impairment teste, which should be carried out at least when there are evidences that such assets may be impaired (lack of profitability, obsolescence, and technologic changes). Moreover, the new accounting standards issued by the Brazilian Accounting Standards Committee (CPC) prescribe that entities should from now on recognize the value of the fixed asset in their financial statements according to the useful lives of such operating asstes (beginning January 1, 2009).
Such statutes set forth that entities shall adopt the depreciation metohd that better reflects the pattern in which the 's future economic benefits are expected to be consumed.
Nevertheless, from a tax perspective Normative Ruling 1,515/2014 determines that depreciation expenses should be calculated on a straight-line basis, according the rates previously established by Normative Ruling 162/1998. Fixed assets are depreciated at rates specified for established asset classes, unless special provisions allow a higher rate.
Annual rates are 4 percent for buildings; 20 percent for vehicles, computer hardware, and software; and 10 percent for machinery, equipment and fixtures.
Taxpayers have the ability of using different rates considered more appropriate for its specific facts and circumstances, as long as they are able to provide adequate support documentation to justify such rates.
An entity operating two shifts a day may depreciate assets used in production at one-and-a-half times the ordinary rate. Companies that operate three shifts a day may use double the normal rate.
Another significant aspect concerns to the accelerated accounting depreciation, which can be carried out based on the work shifts of the production activity. The Income Tax law provides for accelerated depreciation based on the number of daily working hours incurred in the operations involving assets, including machinery and equipment, at the following rates:
- One 8-hour shift:
- Two 8-hour shifts: 1.5
- Three 8-hour shifts: 2.0
After the introduction of the new IFRS rules by Law 11638/07, Brazilian Companies are subjected, as from January 1, 2008, to Tangible/Fixed Asset's impairment tests, which should be carried out at least when there are evidences that such assets may be impaired (lack of profitability, obsolescence, and technologic changes). Moreover, the new accounting standards issued by the Brazilian Accounting Standards Committee (CPC) prescribe that entities should from now on recognize the value of the fixed asset in their financial statements according to the useful lives of such operating assets (beginning January 1, 2009).
Such statutes set forth that entities shall adopt the depreciation method that better reflects the pattern in which the asset's future economic benefits are expected to be consumed. However, Brazilian Tax Authorities issued Ruling (PN 1/11), in which determines that the IFRS effects should be neutralized under the RTT regime, and that the existing depreciation rates pre-IFRS should grandfathered. Note that RTT shall be automatically revoked starting January 01, 2015 as per PM No. 627/13.
Brazilian Transitory Tax Regime
During the transition process from Brazilian GAAP to IFRS after the enactment of Law 11.638/07, and due to the significant changes in the accounting policies used by Brazilian organizations, Brazilian tax authorities introduced the so-called Transitional Tax Regime (RTT or Regime Tributário de Transição). The RTT was optional for calendar years 2008 and 2009 and was created to neutralize the accounting effects under IFRS guidelines from a tax standpoint. From 2010, the RTT became mandatory until the Brazilian authorities issued new regulations and guidance addressing the tax aspects of the new Law. From a practical standpoint, companies that elected RTT would calculate and pay corporate income tax (IRPJ and CSLL), and revenue taxes (PIS and COFINS) based on the accounting rules in effect at December 31, 2007, meaning that any adjustments related under IFRS rules would not affect the tax computation for purposes of IRPJ, CSLL, PIS and COFINS under the RTT regime.
In 2014, the Brazilian government introduced Law 12.973/2014, which repeals the RTT and modifies the existing tax legislation in a broad perspective. Law 12.973/2014 revoked the RTT as from 1 January 2015, but provided for an early adoption election, under which taxpayers are able to adopt the changes made by referred law starting on 1 January 2014.
As from 2015, new rules introduced by Law 12,973/2014 determine that the allocation of the premium in an acquisition of shares should be broken down into two categories, in the following order: (1)identifiable assets acquired and liabilities assumed at fair value; and (2) future profitability (goodwill) or negative goodwill. Both amounts should be recognized in separate accounts and be supported by an independent appraisal registered with the Federal Revenue Service or the registry of deeds and documents.
The deduction for the premium would be taken based on the depreciation and/or amortization of the assets acquired and liabilities assumed at fair value and/or amortized within a minimum five-year period (for the portion allocated to goodwill). The tax amortization triggered by merger would be determined based on the existing accounting balance at the acquisition date.
Other tax adjustments
Government grants and assistance
Temporary non-taxable. Income derived from government investment subsidies and donations, granted as an incentive to the set up or expansion of economic enterprises and recognized on the entity’s P&L shall not be computed on the corporate income tax calculation basis. The non-taxation of such revenues is available only if the entity recognizes the grants on profit reserves (net equity). Such reserves are available only to compensate accumulated losses or to increase paid in capital. Any diverse use of such reserves from the ones mentioned and the capitalization of this reserve shall trigger the addback of such amounts on the CIT calculation basis.
Premium on the issuance of debentures
Temporary non-taxable. Income derived from premiums on the issuance of debentures shall not be computed on the corporate income tax calculation basis, provided that the entity recognizes this premium on specific reserves (net
The conversion to paid in capital of such reserves and the diverse use of such reserves from the ones permitted by Law shall trigger the addback of such amounts on the CIT calculation basis.
Expenses derived from stock issuances
The Brazilian legislation allows the exclusion on the CIT calculation basis of costs derived by primary distributions of stock or subscription bonuses, recognized on net equity. If for any reason, the transaction is reversed, the amounts previously excluded on the CIT computation shall be added back for IRPJ and CSLL taxation purposes.
Costs and expenses associated with the realization of fixed assets by sale, depreciation, amortization, etc., are deductible for IRPJ and CSLL purposes. The depreciation rate for tax purposes, determined by Normative Ruling 162/98, is defined by the expected term of economic use of the asset. However, taxpayers may adopt a different depreciation/amortization rate, if supported by proper documentation (technical reports).
Pre operational expenses
Temporary non-deductible. The expenses incurred on the pre operational/pre industrial phase of an entity or incurred during the expansion of industrial activities shall not be computed on the corporate income tax calculation basis. Taxpayers shall exclude such amounts on the CIT computation at a fixed amount per month at a minimum term of 5 years, as of the beginning of operations.
Long term contracts
For construction contracts with execution term longer than one year, gains or losses for tax purposes derived from such contracts shall be determined based on one of following criteria: (i) the proportion of costs incurred per total estimated costs, or (ii) the actual development of the project (physical progress).
If the entity decides to use a different criteria than the ones mentioned above, it shall add back or exclude on the CIT calculation basis the difference between the two methods (the one adopted by the entity and one of the criteria set out by the tax legislation).
Value added tax - Profit participation contribution (PIS) and social security financing contribution (COFINS)
PIS and COFINS are federal taxes imposed monthly on gross revenue earned by legal entities. PIS is a mandatory employer contribution to an employee savings initiative and COFINS is a contribution to finance the social security system. The calculation method is generally non-cumulative, under which PIS and COFINS are levied on gross revenue at 1.65% and 7.6%, respectively, with deductions of input tax credits for expenses strictly connected to the company's business and prescribed by the regulating laws.
Other calculation methods and special schemes may apply to certain industries and type of revenue. If a company is paying corporate income tax based on a deemed taxable income regime, i.e. under the Lucro Presumido system, the rates are reduced to 0.65% and 3.0%, respectively, and the company is not entitled to input tax credits (cumulative taxation).
The export of goods and services are exempt provided funds effectively enter the country.
PIS and COFINS are due on importations of goods and services from abroad (i.e. PIS-Import and CO-FINS-Import).
Law 13.137/15, published in the official gazette on 22 June 2015, increased the standard PIS and CO-FINS rates levied on the import of goods, from a combined rate of 9.25% (1.65% PIS and 7.6% COFINS) to 11.75% (2.1% PIS and 9.65% COFINS). According to Law 13.137/15, taxpayers are allowed to recognize PIS and COFINS input credits based on the increased rates (under the non-cumulative regime). Others sectors that already were subject to increased PIS and COFINS rates for imports under special regimes (such as cosmetics, machinery, pharmaceuticals and tires) are now subject to combined rates as high as 20%, depending on the harmonized code for the products. The PIS and COFINS rates on imported services remain unchanged (i.e. combined rate of 9.25%).
Federal VAT (IPI)
The IPI is a federal excise tax levied on manufacturer's sales and imports and sales carried out by importers. As a VAT-type tax, the amount paid on imports and other taxed inputs are usually recoverable as tax credits to be offset against company's IPI output debits. The tax rates range from 0% to 330% depending on the type of goods. Typically, the average rate for the IPI is 15%.
State VAT (ICMS)
ICMS is a VAT levied by the Brazilian states on the circulation of goods and the provision of interstate and inter-municipal transportation and communications services. The tax applies even when a transaction and the provision of services commence in another country. A non-cumulative tax, ICMS is collected by most states at the rate of 17%, except for São Paulo and Minas Gerais, whose tax rates are 18%. There are also interstate rates of 12%, 7% and 4%, depending on the location of the recipient and nature of the transaction.
Service tax (ISS)
The tax on services or ISS, a municipal tax, is imposed on the supply of services, other than services subject to ICMS. The list of relevant services is found in Complementary Law 116/2003. The taxable base of ISS is the price of the service rendered. ISS is generally levied by the municipality in which the company that provides the service is established, although in exceptional cases, ISS may be levied by the municipality where the services are performed. ISS rates vary between 2% and 5%, depending on the municipality and the type of service. The importation of services is also subject to ISS, whilst exportations may be exempt if the result of the supply is exclusively verified abroad. Asa cumulative tax, ISS is not recoverable, i.e. no input tax credits are available.
Brazil does not levy capital duty.
Real estate tax
The real estate property tax (Imposto Predial e Territorial Urbano - IPTU) is an annual tax assessed on the ownership of urban real property. The tax, collected by the municipality where property is located, is calculated on a deemed "sales price" of the property. The tax rate varies from city to city, but may be estimated in the range of 0.3% to 1.0%.
Rural property tax (Imposto sobre a Propriedade Territorial Rural - ITR) is an annual tax assessed on the ownership of rural property at rates ranging from 0.03% to 20%, depending on the region and the utilization of the property.
The real estate transfer tax (Imposto sobre a transmissao de bens imoveis - ITBI) is a Municipal tax due upon the transfer of title to real property. The tax rate is progressive, varying from City to City and calculated, roughly on the sales price. The buyer is responsible for payment of the tax.
Brazil does not impose any stamp duties.
Inheritance and gift tax
The ITCMD (Taxation on Donations and Inheritance) is a State tax that levies on donation/Inheritance transactions at rates ranging from 2% to 8% depending the legislation of each State of Brazil.
In addition to the State VAT (ICMS), the Federal Vat (IPI), and the PIS and COFINS-import taxes, the federal government also assesses custom duties (II) on the import of products into Brazil. The import duty is levied upon the nationalization of the goods. Rates vary according to the NCM code of each product, which is based on the Harmonized System codes (HS Codes). Typically the average rate for the II is 14%. The Import tax is not creditable for the importer, and may not be used offset other tax liabilities. There is no Import Duties on services. Imported goods are also subject to the Additional Freight Charge for Renovation of the Merchant Navy ("AFRMM") levied on all imports transported via maritime freight. The AFRMM is levied on the freight charged by Brazilian and foreign navigation companies operating in Brazilian ports. Such charge is calculated on freight price at a rate of 25%. An exemption may apply for the ocean carriage of goods that originated from or were destined for ports located in the north or northeastern regions of Brazil.
Contribution for intervening in economic domain (CIDE)
The CIDE is assessed on outbound royalties and service payments when there is a transfer of technology or when the services provided are considered technical assistance. The rate of the CIDE is 10%. The burden of the CIDE falls on the Brazilian company and is not creditable by the foreign beneficiary (exceptions apply, e.g. trademark). The CIDE on software payments was abolished in 2007. As a result, CIDE is not levied on payments relating to a license or right to trade or distribute software programs, as long as no transfer of source code is involved.
Tax on financial operations (IOF)
The IOF applies to various types of transactions, including loans, insurance policies and short-term money market applications. In general, IOF is levied at the rate of 0.38% on foreign exchange (the acquisition or sale of foreign currency). Certain exceptions apply. Specific IOF rates also apply to portfolio investments under Resolution 4,373/14 when investments are made through the Brazilian financial and capital market. Decree 8.392/2015, published in the official gazette on 21 January 2015 and effective as from that date, increased the IOF levied on credit transactions (loans and factoring) carried out by individuals from 1.5% to 3% per year.
The IOF has been used by the Brazilian government as a tool to stimulate or inhibit the inflow/outflow of foreign currency into/out of Brazil and consequently, to manage the fluctuation of the Brazilian Reais against foreign currencies.
Therefore, loan transactions are subject to IOF at a rate of 6% if a minimum maturity period is not observed. Currently, the definition of "short-term" for purposes of inbound loans and off shore bond issues (overseas debt) comprises those that have a maturity period of less than 180 days.
The IOF is assessed at the time the foreign currency is converted into Brazilian Reais. This also applies to simultaneous foreign exchange transactions (in which there is no effective cash exchange).
The definition of short term for purposes of inbound loans and offshore bond issues must be determined based on the rule prevailing at the time the loan was obtained. The following chart sets out the various changes to the minimum period to maturity since March 2011:
|Decree||Minimum average period (days)||Period||IOF Rate|
|7,456/11||360||29 Mar 2011 - 6 Apr 2011||6%|
|7,457/11||720||7 Apr 2011 - 29 Feb 2012||6%|
|7,683/12||1,08||1 Mar 2012 - 11 Mar 2012||6%|
|7,698/12||1,8||12 Mar 2012 - 13 Jun 2012||6%|
|7,751/12||720||14 June 2012 - 4 Dec 2012||6%|
||5 Dec 2012 - 3 June 2014||6%|
|8,263/14||180||As from 4 June 2014||6%|