Article

Exchange Control, Foreign Investment & Financing

Guidelines on financing, loan transactions and other relevant information, all applied to the Oil and Gas industry

Investments

In Brazil, there is no specific restriction regarding investments. The repatriation of share capital is generally not restricted if the investor registers the original investment, capital increases and capitalized earnings with the Central Bank of Brazil (BACEN). Repatriation is usually accomplished after sale of the shares to a local resident, a capital reduction or termination of the company. Commercial law contains specific rules on share redemptions and on companies re-acquiring their own shares.

Capital is most commonly repatriated through the sale of shares. A foreign investor's capital gain on a sale to a local resident is the excess of the sale price over the foreign capital registered with the Central Bank of Brazil. That gain is subject to a 15% withholding tax, according to the local Tax Law, unless if the beneficiary is an entity domiciled in a low tax jurisdiction (tax haven), in which case a 25% rate applies.

Share capital may be repatriated through a capital reduction but, under certain circumstances, this may trigger withholding tax. Dividends paid out of profits generated after 1995 are not subject to withholding tax. If a company has accumulated earnings, a capital reduction may take place before or after dividends payment. However, if a company has accumulated losses, capital reduction is only allowed if the sum of company’s book accumulated losses and the amount of capital to be redeemed does not exceed its capital stock.

Liquidations seldom occur. They are taxed similarly to a sale of shares. Repatriated funds in excess of the amount of foreign capital registered with the Central Bank of Brazil are subject to 15% withholding tax, or 25%, when the foreign investor is an entity domiciled in a tax haven jurisdiction.

Exchange Controls

In order to simplify the exchange market, the Brazilian National Monetary Council (CMN) and the Central Bank of Brazil have enacted Resolutions (Resolution 3844/2010, Resolution 3845/2010, Resolution 3967/2011 and Resolution 4051/2012) which aim to consolidate the exchange market rules. This exchange market is under control of the BACEN and is ruled by the International Capital and Foreign Exchange Market Regulation (RMCCI).

As a general guideline, the RMCCI allows legal entities and individuals to purchase and sell foreign currency and perform international transfers in Brazilian Reals, regardless of the nature of the operation, with no restriction with respect to the amount involved.

Additionally, such regulation requires the transactions in the foreign exchange market to be performed solely through market agents duly authorized by the Brazilian Central Bank. This means that, in such transactions, either the buyer or the seller must be an agent authorized to operate in the foreign exchange market.

The aforementioned permit applies to almost all transactions performed in the Brazilian exchange market. Only a few transactions are subject to specific rulings, such as investments performed in foreign stock or derivatives market or foreign investments held by an entity whose authorization to operate had been previously granted by the the Brazilian Central Bank.

In general, in order to perform a transaction in the exchange market, the Central Bank only requires the involved parties to formalize it through an exchange contract and to register it before the Central Bank Database System (SISBACEN). There is no specific provision with respect to the documentation that must support the exchange contract. Normally, the contract whose execution led to the currency exchange is required, together with other documentation able to prove the transaction’s lawfulness as well as its economic ground and the responsibilities of the parties involved therein.

A foreign investor planning to incorporate a company in Brazil may capitalize such company by means of subscribing capital shares or by loans.

BACEN registers all investments, whether in the form of capital or in the form of loans. Loans are generally registered through the RDE-ROF Module and direct investments are subject to registration through the RDE-IED return. In the RDE-ROF Module, the funds sent to Brazil may be registered in foreign currency while in the RDE-IED such funds must be converted into local currency ("Real"), in order to qualify for registration with BACEN.

The registration process of foreign investments, whether in the form of capital or loan, is relatively simple and straightforward. The exchange contract must be made through a financial institution authorized by BACEN to operate in exchange (normally a commercial bank).

Profits that are reinvested in the business must also be registered as Foreign Registered Capital (FRC), normally called reinvestment, and will generate registration in local currency through RDE-IED, in the amount corresponding to the profits that would be remittable as dividends.

Funding and profits remittance

The funding of a Brazilian legal entity is usually done through capital contribution (resulting in a paid-in capital, converted into local currency) or loans.

The remuneration of the invested capital will be the profits and/or dividends and interest on net equity, which may be referred to as a “tax deductible” dividend payment.

Loan Transactions 

Loans from overseas are to be registered before Brazilian Central Bank (BACEN) through an electronic based system named ROF (“Registro de Operações Financeiras”), in which the details of the loans are to be informed, such as principal, interest rates, denomination of the currency, due dates, etc. There are no currency restrictions for loans, which may be denominated in Reals, Euros, etc. BACEN’s rules also do not commonly impose a given interest rate, but Brazilian transfer pricing rules shall apply to intercompany loans and deductibility is conditioned to rules whereby:

  • Acceptable rate consists of a combination of a “rate,” plus a spread
  • Different rates are provided, depending on the type of transaction, the currency used and other factors
  • Annual spread is limited to maximum rate of 3.5% for inbound financial transactions, where the Brazilian taxpayer is paying interest to a foreign related party.

A specific agreement is necessary to support loan transactions. This document will be required for the remittance of interest and principal abroad and to prove the interest expense deductibility, if any, for income tax purposes.

Withholding Income Tax Imposition

Interests on loans are subject to Withholding Income Tax (IRRF) at a 15% rate (increased to 25% if the beneficiary is domiciled in a tax haven jurisdiction).  IRRF will be due on amounts paid, credited, delivered, used for, or remitted to beneficiaries resident or domiciled abroad, by a source located in Brazil.

With such broad definition, the Federal Government aimed to cover all situations in which income is made available to a foreign beneficiary, regardless of the method of availability. In this sense, the tax is due if, and when, any of the listed events (payment, credit, delivery, use or remittance) materializes. 

Foreign Exchange Variation

A foreign currency loan is subject to foreign exchange variation, thus eventual gain or loss may affect the P&L and, consequently, the corporate income taxes due. As provided by Provisional Measure No. 2,158-35/01, Brazilian companies may elect to calculate IRPJ, CSLL, PIS and Cofins on currency exchange variations either on an accrual basis or on a cash basis.

Historically, the financial income obtained by companies was subject to PIS and COFINS at a zero rate. However, Brazilian tax authorities reestablished as from July 2015 the levy of PIS and COFINS on financial revenues earned by companies subject to the non-cumulative regime, at the rates of 0.65% and 4%, respectively. 

An exemption to this rule is made to incomes arising from the fluctuation of foreign exchange rates on liabilities of the taxpayer, including loan and financing. Nevertheless, foreign exchange gains on loan transactions where the Brazilian entity acts as the lender are subject to PIS and COFINS at the rates indicated.

Decree 8,451 also provides new rules with respect to how companies account for exchange-rate variations used in the calculation of various taxes (IRPJ, CSLL, PIS and COFINS). Taxpayers will be able to elect to be taxed on foreign exchange rate variations on a cash or an accrual basis to the extent that, in a particular calendar month, the variation (positive or negative) exceeds 10%.

The 10% variation will be determined based on the US dollar rates on the first and last day of the calendar month, and the change in the cash or accrual basis taxation may be effected in the month following the month in which the 10% variation was exceeded. A change can be made any time the monthly 10% threshold is exceeded, and will be valid for the entire calendar year; however, if the 10% variation occurred from January through May 2015, the change of regime must be made in June 2015.

Thin Capitalization Rules

Brazil’s thin capitalization rules have been clarified in Normative Instruction (NI) 1,154/2011. The original thin capitalization rules were introduced by Provisional Measure No. 472/09 and converted into Law No. 12,249/10 in June 2010. The new legislation provides guidance on the scope and computation of deductible interest expense based on the debt-to-equity ratios in Law No. 12,249/10, and is effective as from 13 May.

Criteria for deductibility of interest paid or credited take into account the relationship between the lender and borrower, as well as the residence of the lender. The applicable debt-to-equity ratio depends on whether interest is paid to a party (whether or not related) located in a tax haven or a jurisdiction with a privileged tax regime:

  • When interest is paid or credited to a direct shareholder not located in a tax haven or privileged tax regime jurisdiction, the debt-to-equity ratio applicable to related debt may not exceed 2:1, calculated based on the proportion of related party debt to the direct equity investment made by the related shareholder.

- Under a “stand-alone deductibility test,” each direct shareholder debt is compared to the net equity ownership of each direct shareholder. For non-shareholders, each non-shareholder debt is compared to the debtor’s total net equity.

- A second test requires that the overall debt-to-net equity ratio, as calculated based on the total related party debt (whether or not owed to direct shareholders) versus the total related party net equity ownership, not exceed 2:1.

  • Interest paid or credited to an entity or individual located in a tax haven or privileged tax regime jurisdiction may be deducted provided the debt-to-equity ratio does not exceed 0.3:1. The deductibility of interest expense is limited according to the ratio that the total amount of debt with foreign parties located in a tax haven jurisdiction/privileged tax regime jurisdiction (regardless of whether the lender is related to the debtor) bears to the total net equity of the Brazilian borrower. Tax haven/privileged tax regime jurisdictions are included in “black” and “grey” lists issued by the Brazilian tax authorities.

In both instances, the interest expense must be necessary for the Brazilian company’s operations, so that even if the debt-to-equity ratios are respected, unnecessary leverage can be disregarded by the Brazilian tax authorities.

For purposes of determining the total indebtedness, all financing forms and terms must be taken into account, regardless of whether the transactions are registered with the Brazilian Central Bank.

Transfer pricing regulations provide guidelines on how taxpayers should apply the criteria and calculate nondeductible excess interest expense, as follows:

  • Calculation methodology: Indebtedness for purposes of thin cap rules should be computed on a monthly average basis, determined by dividing the sum of the daily balance of indebtedness (including principal and outstanding interest) by the number of days in the corresponding month.
  • Net equity comparison: In determining the debt-to-equity ratio, the taxpayer may opt to use the net equity as of 31 December (or at end of tax year) or the net equity including the results recognized as from the last month of interest accrual.
  • Formula to determine excess interest: The monthly amount of interest deductible for purposes of the income tax (IRPJ) and the social contribution on net profits (CSLL) is determined by reference to the maximum allowed indebtedness percentage arrived at by dividing the total indebtedness by the total amount of indebtedness with related parties or parties in tax havens/privileged regime jurisdictions. The nondeductible excess interest is determined as the difference between the total interest expense accrued in the relevant tax period and the allowed indebtedness percentage multiplied by the interest expense accrued.
  • Average computation: Although the thin cap excess is determined on a monthly basis, the amount of monthly indebtedness at the closing of the tax period (quarterly or annual) also is averaged by dividing the sum of the monthly indebtedness by the number of months in the corresponding tax period (i.e. three or 12 months). This is an important clarification indicating the possibility of recalculating the average at the end of the tax period, with a potentially “diluting” effect.
  • Related parties: concept of related parties provided by Brazilian transfer pricing regulations is broader than the corporate law definition. Additionally, the concept of two entities under “common administrative control” corresponds to a situation in which key decision-makers such as a CEO and board members take an active role in both entities.
  • Guaranteed loans with Brazilian creditors: Back-to-back arrangements and loans guaranteed or co-signed by a related foreign individual or entity or a party located in a tax haven/tax privileged regime with Brazilian creditors are not subject to the thin capitalization rules, unless the loan concerned is in default and the guarantor assumes the debt. In such a case, the thin capitalization rules apply as from the date the guarantor starts paying the liability.
  • Bonds issued by a Brazilian entity: The thin capitalization rules do not apply to the extent the following requirements are cumulatively met: (i) bonds are distributed to at least 40 investors; (ii) a sole investor or an investor together with its related parties has not acquired 20% or more of the bonds issued; and (iii) the sole investor or an investor together with its related parties does not receive more than 20% of the total income paid with respect to the bonds issued.

Amounts paid, credited, delivered, used or remitted directly or indirectly to an entity or individual incorporated or resident in a tax haven jurisdiction or benefiting from a preferential tax regime may be deducted only if the taxpayer can, cumulatively:

  • Identify the recipient of the proceeds;
  • Demonstrate that the entity or individual has the “operational capacity” to carry out the transaction for which the payment is made; and
  • Submit documentation showing the purchase price paid and the receipt of the goods or rights or that the services have been used.

The recipient for these purposes is the individual or entity (provided that, in the case of an entity, it was not incorporated for the sole or main purpose of obtaining tax savings) that receives the proceeds on its own behalf and not as an agent or a fiduciary manager, or under a power of attorney.

Although there was a certain expectation that the tax authorities would clarify the term “operational capacity” stated in the law, no further clarification was provided. Additionally, some questions remain as to whether the above provision also applies to interest.

NI 1,154/11 clarifies the thin capitalization rules by addressing uncertainties relating to the computation of interest under the original rules. 

Tax on Financial Transactions (IOF)

IOF is a federal tax levied on credit, exchange and insurance transactions and financial transactions. At present, its regulations are consolidated in Decree 6306/07 (IOF Regulations).

IOF is imposed on foreign exchange transactions and has been used by the Brazilian government as a tool to stimulate or inhibit the inflow and outflow of foreign currency into/out of Brazil and, consequently, to manage the appreciation/depreciation of the Brazilian Real against foreign currencies. Brazilian legislation allows the government to make changes to the IOF rate as needed, meaning that changes can be implemented with very short notice.

According to the IOF Regulations, in the case of exchange transactions, for instance, the applicable rate may reach as high as twenty-five per cent (25%). After the end of CPMF, the government made some changes in the IOF legislation, such as the increase of some IOF rates (usually to 0.38%), trying to compensate partially the tax collection losses.

Currently, international loan transactions are subject to 0% IOF upon foreign exchange contracts for the conversion of loan funds made available to Brazilian entities, as long as the loan term is higher than 180 days (otherwise 6% IOF will apply).

On March 2 2018, the Brazilian government increased the IOF rate applicable to foreign exchange transactions on the transfer of funds from a Brazilian bank account to a foreign bank account held by a Brazilian resident (whether a legal entity or individual), from 0.38% to 1.10%.

Registration with the Brazilian Central Bank

According to the Brazilian Legislation, foreign currency loans must be registered with the Brazilian Central Bank, which will enable the borrower to remit  payments abroad of interest and repayment of the loan.

Once a loan agreement is registered, any future amendment for the determination of the amounts disbursed, interest rates, term of payment etc., shall also be registered with the Brazilian Central Bank, otherwise the terms already established must be observed.

The interest due is payable irrespective of the profitability of the Brazilian entity. In addition, interest expense deduction is subject to Brazilian thin capitalization rules.

Brazilian Central Bank rules do not allow pre-payment of the contract prior to the date previously reported in the transaction’s electronic registration (RDE). However, extensions to the loan can be granted (so long as they are duly registered with the Brazilian Central Bank).

Capital Contribution

Capital contribution to a company established in Brazil must be registered according to Brazilian Central Bank rules, as detailed below.

Direct investments must have a registration, represented by a certificate, which enables a foreign investor to exercise its rights, such as: repatriation of capital, remittance of profits, interest on capital payments, etc.

The Foreign Capital Certificate identifies the investee, the foreign investor, the investment value in foreign currency, and the equivalent in Brazilian currency (Real) and the number of shares/quotas that make up the capital.

As mentioned above, funds entering Brazil should be registered in the country’s currency (Real). The conversion of the foreign currency effectively entering the country into Reals should be done at the buying rate in effect on the date of the actual inflow of the funds.

Section 5 of Law 4350/1964 states that the foreign investment must be registered within 30 days upon the date of the capital inflow. Circular 2997/2000 from the Central Bank of Brasil establishes the main guidelines to be followed upon registration of the foreign investment in Brazil and implemented the Declaratory Registration of Direct Foreign Investments – RDE-IED Module. This system allows online access to the registrations mentioned above; any outflow of capital abroad shall only be allowed through the RDE-IED Module.

The company receiving the direct foreign investment (Brazilian subsidiary) and the non-resident investor (through its representatives in Brazil) are responsible for the registration of the investment.

Currently, Circular 3589, enacted on April 2012, has consolidated the rules for exchange and foreign investment procedures (RMCCI - Regulamento do Mercado de Câmbio e Capitais Internacionais).

The registration of the foreign investment carried out via the FDE-IED Module is mandatory; the same provision applies to the capitalization of profits by a foreign investor.

The investee that fails to file such registration at the time provided in such legislation, or that files a registration which does not show the information required by that legislation, shall pay a penalty that varies depending on the nature of such failure.

Apart from the aforementioned statutory requirements, the registration of the foreign investment with Brazilian Central Bank is key to avoid future questionings by relevant authorities with respect to the remittance of dividends, interest on capital, or repatriation of capital to shareholders domiciled abroad.

Registration of foreign capital investment with the Brazilian Central Bank depends on the following general requirements:

  • The foreign investor must not reside in Brazil;
  • The foreign investor must have remitted to Brazil foreign currency or capital assets as a capital contribution to a local company;
  • Brazilian Central Bank only recognizes foreign currency remittances to Brazil that are made via normal banking channels and exchanged into Reals in accordance with existing regulations, at an authorized financial institution;
  • The importation of capital assets as capital contribution must have the prior approval of the Brazilian Central Bank and the import/export authorities;
  • The foreign investor, through his capital contribution, becomes a shareholder in a local company.

For the purpose of registration, Law 4131/1962 defines foreign capital as "(...) goods, machines and equipment brought into Brazil with no initial exchange outlay, and which are to be utilized in the production of goods and services, as well as the financial or monetary resources introduced into the country for investment in economic activities. In both cases, they pertain to individuals or legal entities, resident, domiciled or with headquarters abroad".

To register a capital investment in the RDE-IED Module, the foreign investor needs to report its Cademp number. “Cademp” stands for “Companies’ Register” and it is a record maintained by the Brazilian Central Bank encompassing the main data on both Brazilian and foreign investors.

The Cademp number will only be effective, for purposes of registering a capital investment in the RED-IED Module, once the foreign entity obtains its CNPJ number (National Register of Corporate Entities). A temporary CNPJ number is granted to the foreign investor on the first time it registers itself in the Cademp. Such temporary CNPJ number is only effective for a period of 180 days. Thereafter, the foreign investor must provide for its permanent register within the CNPJ.

The DECEC (Department of Foreign Capital and Exchange) – a department of the Brazilian Central Bank – is the one responsible for the registration of foreign capital. The following transactions are subject to registration:

  • Direct investments;
  • Loans in cash or in assets;
  • Repatriation of capital and remittances of profits or capital gains abroad;
  • Remittances abroad of loan interest and repayments of loan principal;
  • Royalties and technical assistance contracts;
  • Any operation involving transfers of earnings abroad;
  • Reinvestment of profits;
  • Loans in cash or in assets;
  • Repatriation of capital and remittances of profits or capital gains abroad;
  • Remittances abroad of loan interest and repayments of loan principal;
  • Royalties and technical assistance contracts;
  • Any operation involving transfer of earnings abroad;
  • Reinvestment of profits.
Profits/Dividends Remittance

Dividends are calculated upon net profit after corporate taxes, accrued based on the Brazilian commercial legislation and are not subject to withholding income tax, regardless of the location of the beneficiary.

However, the Brazilian legislation imposes some restrictions to the distribution of dividends to foreign shareholders:

  • Foreign investors are not allowed to receive profits or dividends related to unpaid capital;
  • Holding companies owned by foreigners are not allowed to receive profits or dividends related to unpaid capital participation in the subsidiary companies;
  • Accumulated losses must be totally offset by profits before the distribution of profits, and only the excess is considered to be available for distribution;
  • There are no limitations to the amounts of profits to be remitted, as long as they exist. Accumulated losses could be offset by capital reduction;
  • Shares or quotas that generate remittable earnings are those “registered”, i.e., included in the foreign investment certificate, registered before the Brazilian Central Bank (BACEN). Thus, if by any reason not all of the capital (in number of shares or quotas) is covered by the certificate (“taint” in the capital), only the registered part shall generate remittable earnings;
  • The exchange rate to be used is the selling rate in force at the effective date of the remittance.
Interest on Net Equity

A company may decide to pay Interest on Net Equity (INE, as we will be referring to hereinafter) to its shareholders/quota holders. A company may decide to pay interest on capital at year-end or during the year on an interim basis.

The amount of payable INE is calculated based on the Long Term Interest Rate (TJLP), the local prime rate that is quarterly fixed by the Brazilian Central Bank, applied to each shareholder's portion of net equity. Brazilian corporate law establishes that current earnings are not included as part of the net equity. Brazilian corporate law establishes that current earnings are not included as part of the net equity.

A company has the flexibility to use an interest rate that is lower than the TJLP to calculate the INE, but the chosen rate may not exceed the daily variation of the TJLP.

INE is deductible to the extent it does not exceed fifty per cent (50%) of largest of the following amounts:

  • Net income, as determined for accounting purposes, for the current period of interest payment before the provision for income tax and the deduction of the amount of interest; or
  • Accumulated earnings from prior years.

In contrast to dividends, which are exempt from withholding tax, INE is subject to withholding tax at the rate of 15% or 25%, when the beneficiary is domiciled in a low tax jurisdiction, as defined in Brazilian tax law. This is because INE is considered a financial expense for tax purposes, although it is effectively a return on equity.

The withholding tax obligation arises on:

  • The date of the payment of INE;
  • When the amount of such interest is credited to the beneficiary; or
  • When it is recognized as available by the balance sheet of the company.

The tax legislation requires that payment of the withholding tax should be made by the third working day of the subsequent week following the payment or credit of INE to shareholders or quota holders.

The company’s by-laws must provide the ability to choose to pay INE. Brazilian Central Bank requires companies to present the minutes of the shareholders or quota holders (in the case of a Limited Liability company, or simply “Ltda.”) meeting approving the payment of INE. These documents will also authorize remittances based on retained earnings and have to be attached to the balance sheet of the period as well as on profits generated during the period duly supported by a pro-forma balance sheet.

As previously mentioned, a Brazilian company may not legally pay dividends during a year in which it has also accumulated losses that exceed current earnings. Even though we believe that this rule should not apply in the case of INE, it is not entirely clear in the local tax legislation. For Brazilian Central Bank purposes, however, the INE should be treated as dividend.

Therefore, a company is not allowed to remit INE if has accrued loss greater than retained earnings. In other words, a company must first offset its loss balances, before remitting INE abroad.

Another relevant aspect is that a given company can decide to pay both INE and dividends in the same year. The fact that the company decides to calculate INE does not avoid dividend payment. If the company complies with the aforementioned requirements, it can calculate the amount of deductible INE. Besides, if the company has accumulated profits, it can also distribute dividends to its shareholders/quota holders.

Finally, the foreign exchange contracts for the remittances of the INE to shareholders overseas will be subject to the imposition of the Tax on Financial Transactions (IOF) at a 0.38% rate.

Capital Gain

As per the Brazilian tax legislation, in case a foreign entity directly sells its investment in a Brazilian entity to another resident entity, such transaction is subject to Brazilian Capital Gains Taxation (15% rate applies; increased to 25% if the beneficiary is domiciled in a tax haven jurisdiction).

In addition to the above, in case a foreign entity sells its investment in a Brazilian entity to another foreign entity, the Brazilian Tax Authorities understanding is also that such transaction would be subject to Brazilian Capital Gains Taxation, in case no substance can be deemed to have existed in the transaction and that its sole purpose is to avoid capital gain taxation in Brazil. In this case, tax payments would be made by the foreign entity's representative in Brazil.

With respect to capital gains calculation, it is important to mention that Article 18 of Law 9,249/95 provides that the capital gain accrued by a resident or domiciled overseas must be calculated and subject to taxation according to the rules applicable for Brazilian residents.

Complementing such legal provision, Brazilian tax authorities enacted a Regulatory Instruction, which provides that referred taxation should be the same applicable for Brazilian individuals. However, as a result of several administrative decisions, there is controversy on what should be the basis for the capital gain determination, as well as on what should be the currency in which the gain determination should be based.

Capital Repatriation

It consists of a direct remittance, performed through a bank, without the previous authorization of the Brazilian Central Bank. It must be supported by a Registration Certificate, in which the amount to be remitted, in foreign currency, must be stated. A demonstrative schedule of the capital gain calculation, as well as its respective payment voucher is required.  This is due to the fact that, at the time of the repatriation of the investment, the value of such investment is subject to an exchange variation.  In case such exchange generates a capital gain, it might be subject to withholding income tax.

If the amount to be remitted exceeds that which is registered in the Certificate, the excess can only be remitted upon obtaining of a specific Remittance Authorization Certificate, to be issued by the Brazilian Central Bank.

This operation is performed as a mean to repatriate resources to the investor abroad.  The repatriated amount is calculated taking into consideration the book value of each share or quota. The rules applying to such transactions are as follows:

  • Exemption of Withholding Income Tax: The operation is exempt from withholding tax as long as the amount to be remitted does not exceed the cost of acquisition, in Brazilian currency (Real) of the shares or quotas;
  • Withholding Income Tax: Withholding tax is applicable, at a 15% rate, on the capital gain amount, unless when the beneficiary is an entity domiciled in a low tax jurisdiction, when a 25% rate should apply.

However, in order to perform such operation, the company needs first to eliminate the accumulated loss figures, since the Brazilian Central Bank procedures do not allow a company to perform a transfer abroad, as Capital Repatriation, showing an accumulated loss in its Financial Statements.

Therefore, if the company has accumulated losses by the time of the repatriation, it will need to perform a reduction in its capital figure, in an amount corresponding to the accumulated losses.  As a matter of fact, when the company accesses the Brazilian Central Bank Electronic Register (RDE-IED), it will be required to report the Net Equity figures for the closed Financial Statements, also considering the effects of the capital reduction performed to absorb the previously registered losses.

It is also recommended that the company limits the capital repatriation to an amount that does not exceed the losses projected for the calendar year in which the repatriation is to take place, since the Brazilian Central Bank requires that Brazilian companies with foreign investors report, each year, its net equity figures at the closing date. If the company remits abroad, through capital repatriation, an amount exceeding its final net equity figure, the Central Bank of Brazil will not authorize undertaking another capital reduction until the company restores its net equity to a positive figure.

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