Recently through the Response to the Formal Consultation COSIT #75/2023, the Brazilian IRS has decided that amounts paid, credited, delivered, used or remitted abroad, by the end user, for the purpose of acquiring or renewing a license to use software characterize royalties, regardless of the existence customization or the means used in delivery of such software, and so, are subject to withholding income tax (IRRF) at a rate of 15% and in the case of the beneficiary resident or domiciled in a country with favorable taxation, 25%.
As previously reported, through Provisional Measure #1,152 (of December 28, 2022), amendments were made to the Corporate Income Tax (IRPJ and CSLL) legislation with regard to the rules of Transfer Pricing (TP) in Brazil. Such measure is considered to be an approximation of Brazil to the OECD, being part of the changes foreseen for the country's entry into the Organization.
Since it is a Provisional Measure, the next step of such regulation to enter in force as law, that it has being going through since March 2023, is the text to go under analysis before the Brazilian Chamber of Deputies. Recently, on the 10th of May, such text was approved by the referred chamber.
The main change introduced by the Brazilian Senate would be the elimination of the deductibility restrictions related to royalties and services remitted to entities or individuals located in tax havens or privileged tax jurisdictions, among other minor changes.
Recently, the Brazilian Federal Supreme Court (STF) has ruled to suspend the trial of the cases in the Superior Court of Justice (STJ) that deal with the possibility of excluding the tax benefits of ICMS from the calculation basis of the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL).
On the 5th of May, the Brazilian STF have overruled such suspension, on the grounds that the delay on the trial of this subject may generate damages for the Union, since there are several cases with very relevant amounts that discuss this subject.
The Brazilian Supreme Court of Justice (STJ) ruled in favor of the subjection to IRPJ/CSLL on the gains obtained with the correction of judicial deposits through the Selic rate. Unanimously, in a court of retraction, the ministers maintained the understanding that the interest incurred in the return of judicial deposits has a remunerative nature and does not escape taxation by the IRPJ and CSLL.
The Provisional Measure (MP) #1,171/2023, published on April 30, 2023, brought relevant changes regarding the rules for the Brazilian Individual Income Tax (IRPF) regarding income earned from financial investments, controlled entities and trusts located abroad of ownership of Brazilian residents.
Starting in 2024, in addition to the Annual Income Tax Report, individuals must report separately from other income and capital gains, the income from capital invested abroad, in the modalities of financial investments, profits and dividends of controlled entities and assets and rights subject to trust.
The main aspects of the referred MP are the following:
I - Financial investments (Article 3):
• Progressive rates from 0% up to 22.5%
• Taxation through the cash basis method
• Exchange rate variation taxation
II – Controlled Companies (articles 3 and 6):
• Progressive rates from 0% up to 22.5%
• Profits generated from 01/01/2024 will be taxed at the end of each year
• Profits generated until 12/31/2023 will be taxed only on the availability, and legal exceptions may apply
• Losses generated as of 01/01/2024 may be compensated
III – Trust abroad (articles 7 to 9):
• Assets and rights declared in the founder
• Transfer to beneficiaries treated as a donation
• Assets and rights taxed at the founder’s location, according to its nature.
IV – Update of the value of goods and rights located abroad (articles 10 and 11):
• Assets and rights abroad reported in Individual Income Tax Report may have the updated market value considering the date basis of 31.12.22
• Taxation on the gain will be at 10%, and the tax must be paid depending on the option of the taxpayer (Nov/23 – May/24)
• Gain will integrate additional acquisition cost
• Possibility of choosing the good or right updated
• Future distributions will reduce the cost of acquisition, without new taxation
Regarding the effectiveness, although the text of the MP brings its validity to from January 1, 2024, we emphasize that its scope would be for the Individual Income Tax Report of 2024, calendar year 2023.
Finally, considering its nature as a Provisional Measure, such dispositive may be converted into law within 120 days of its publication.
