David Roberto R. Soares da Silva
Preface to the Third Edition
Brazil Tax Guide for Foreigners has become the leading reference work in the
English language for those interested in foreign investment in Brazil. No other
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two editions have reached multinational companies, tax practitioners, government
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DIHDWIRUDSXEOLFDWLRQWKDWLVQRWVROGLQERRNVWRUHVRQOLQHVDOHVRQO\DQGWKDWKDV
limited advertising and marketing.
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FRUSRUDWH WD[DWLRQ +RZHYHU PDQ\ UHDGHUV VXJJHVWHG WKDW WKH ERRN VKRXOG DOVR
address in more detail individual taxation, particularly issues affecting expatriates
working and living in Brazil.
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ZKLFKFRYHUHGWKHWD[DWLRQRISUR¿WVKDULQJSD\PHQWVWKHPRQWKO\VHOIFRPSOLDQFH
UHJLPHIRULQGLYLGXDOVWKHVRFDOOHGcarnê-leão1DQGDVSHFWVRIWKH¿UVWLQFRPHWD[
return for expatriates. An appendix explaining the types of permanent visas available
to foreign individuals investing, working, or living in Brazil was also added.
But the topics in the second edition are not limited to personal taxation; the Guide
also addressed new topics for corporate taxpayers, such as the 2012 changes to the
transfer pricing rules, the new social security tax on monthly gross income, new
federal special tax regimes, WD[LQFHQWLYHVIRUWKH6XPPHU2O\PSLF*DPHVLQ
Rio de Janeiro, the new money laundering statute, state taxation of imported goods
and online sales, and the municipal taxation of imported services.
The third edition updates the topics in the previous editions and expands the
content even further. It explains the new CFC rules for corporate taxpayers, as well
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ZRXOGKDYHPDGHWD[GHIHUUDORIIRUHLJQVRXUFHLQFRPHPRUHGLI¿FXOW7KH*XLGH
also covers new considerations relating to imports and exports of goods and services,
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FRPSDQLHVDUHFHQWUXOLQJRQDQH[HPSWLRQIURPORFDOVHUYLFHWD[,66IRUH[SRUWHG
services, and Supreme Court precedents and tax changes concerning the levy of
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)LQDQFLQJRI6RFLDO6HFXULW\&2),16RQLPSRUWV
Information about important tax controversies and disputes has also been added
or updated, including the Supreme Court decision on the 2001 CFC rules and the
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No equivalent translation in English.
15
BRAZIL TAX GUIDE
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over domestic tax laws, the Supreme Court ruling on heavy tax penalties; the Court’s
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dividend distributions.
Two new topics were added in the tax litigation section: one concerning possible
preventive measures the tax administration can take against taxpayers to ensure
payment of unpaid taxes, and the other dealing with procedures the tax administration
must follow when making an assessment against multiple taxpayers.
In addition, two appendices that are not directly connected with taxation were
DGGHG $SSHQGL[ EULHÀ\ GHVFULEHV WKH OLPLWHG OLDELOLW\ FRPSDQ\ WKH VRFDOOHG
limitada WKHPRVWSRSXODUW\SHRIEXVLQHVVHQWLW\XVHGE\IRUHLJQLQYHVWRUV7KH
appendix includes an example of a limitada’s articles of association in English, with
useful comments and footnotes for a better understanding of how this type of entity
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which was introduced in Brazil’s legal system 40 years after the convention was
concluded. The convention is an important tool to enforce the full application of tax
treaty provisions by Brazil’s tax administration, which historically has been very
reluctant to cede its taxing powers to international laws.
16
David Roberto R. Soares da Silva
Preface to the First and Second Editions
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Brazilians: October 2, 2009, the day when Rio de Janeiro was chosen to host the
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0DGULG,WZDVWKH¿UVWWLPH2O\PSLF*DPHVZRXOGWDNHSODFHLQ6RXWK$PHULFD
Watching the national news that evening when Mr. Jacque Rogge, the president
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from an envelope, I thought to myself: the coming decade will be unprecedented to
Brazil. A few years earlier, in 2004, I was on my honeymoon with my wife in Greece
and could see and feel the transformation the country was undergoing because of the
Summer Olympic Games taking place within a few weeks.
Almost two years before, Brazil was awarded to host the 2014 Soccer (football
WRXV%UD]LOLDQV:RUOG&XS,WKDGEHHQDOPRVW\HDUVVLQFH6RXWK$PHULFDODVW
KRVWHGWKH:RUOG&XSLQ$UJHQWLQD
It did not take long until estimates for investments started to pop up everywhere.
If direct investments in infrastructure alone for the 2014 Soccer World Cup were
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2O\PSLF*DPHV,KDGQRGRXEWWKDW%UD]LOZDVJRLQJWREHRQHRIFHQWHUVRI
attention during the 2010’s decade, at least from a sport standpoint.
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almost unharmed. Shifting focus to domestic markets, reducing taxes and
promoting local consumption, the country was able to leave the crisis stronger
than it had entered it. Many observers and international organizations started to
look to Brazil from a different perspective: Brazil was no longer a mere emerging
market struggling to export its goods to the rest of the world. It was no longer
WKH FRXQWU\ NQRZQ RQO\ IRU LWV RXWVWDQGLQJ VRFFHU SOD\HUV OLNH 3HOp 5RQDOGR
and Kaká, samba, beautiful beaches and nice music. For years Brazil had been
a politically stable country; but now something was different: Brazil was also
a strong economy, with growing consuming markets, and very respected by the
international community.
As a lawyer who assists many foreigners investing in Brazil, it was incredible
to see how many companies, and also individuals, became interested investing
in the country, taking advantage of what could be one of the greatest investment
opportunities of the coming decade.
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publications and over 20 years of experience in assisting foreign companies to invest
in Brazil I have never seen so much interest in the country. And as amazing as it
could be, investors were not interested only in business somehow related to the
World Cup or the Olympic Games. The interest was for all kind of businesses: real
17
BRAZIL TAX GUIDE
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estate, construction, forestry, energy, information technology, sociologic research,
software, among many others.
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SD\LQ%UD]LO7KH\FRPHNQRZLQJWKDW%UD]LOLVQRWDQHDV\SODFHWRGREXVLQHVVWD[
wise; many have heard about the complexity of the tax system, the different levels of
taxing powers, confusion of tax jurisdictions; strict exchange and currency controls,
etc. That is not a concern exclusive to foreigners, but also to local companies,
businessmen and entrepreneurs. And unfortunately, all of this is true, at least partially;
but it does not mean that someone with no background or experience in Brazilian
taxes cannot have some knowledge of how our tax system works.
The question I then asked myself was what kind of book I wanted to write. It
could be a very technical book on some corporate income tax issues or tax planning;
RULWFRXOGEHDEULHIRYHUYLHZRIWKHWD[V\VWHP7KH¿UVWFRXOGEHLQWHUHVWLQJIRUD
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I decided to do something in between: it should include an overview of the
Brazilian taxation system and also a deeper review of Brazil’s most relevant taxes
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disputes over each tax. It should also address comments on the most important issues
concerning exchange controls as investors need to know not only how to send their
money into the country, but also how to get it back home.
This would help me reach two different worlds: that of foreigners desiring to
understand how Brazil’s tax system works so they can come and invest in Brazil,
and also that of Brazilian professionals – my friends and competitors – assisting
foreigners doing business in Brazil.
Because of the complexity of Brazil’s tax system, it is difficult sometimes
even for Brazilian professionals to translate clearly and exactly some concepts
and details concerning Brazilian tax laws. Also, professionals with different
backgrounds and international experience tend to use their own vocabulary,
which sometimes makes opinion comparison and comprehension by those
uneducated in Brazilian taxes more difficult.
This book is an attempt to create some accessible literature on Brazil’s tax laws
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Brazil or elsewhere.
18
David Roberto R. Soares da Silva
Introduction
Brazil has, probably, one of the most complex tax systems in the world,
where federal, state, local governments have taxing powers over transactions
expressly contemplated in the federal Constitution.
Like few other countries, Brazil’s tax system is fundamentally based on
the Constitution. The Constitution does not create taxes per se; instead, it
lists all taxes that each taxing power is entitled to create by means of their
corresponding legislative powers. An exception exists at federal level, where
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called provisional measures.
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with immediate effect, where review, amendment and approval are carried out
by the Legislative Branch after the act has become valid and enforceable. Over
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has become routine as they have the advantage of having immediate effect and
enforceability. Congress has tried to limit the use of provisional measures by the
Executive Branch by approving changes to the Constitution, but in practice the
use of measures for tax issues has not been reduced.
The complexity of Brazil’s tax system also derives from the fact that the
Constitution does not limit its provisions to a mere list of taxes that taxing
powers can create. It goes further by establishing specific constitutional
principles and rules which must be followed by the taxing powers. Some
principles and rules apply to the creation or change of tax rules in general;
others apply to certain taxes only.
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such as the one that requires income tax, whenever possible, to observe the
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An example of a general rule is the one that requires that taxes can be created
or changed only by means of a law approved by the Legislative Branch. Even
such rule has exceptions in the Constitution: some taxes, like the federal excise
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have their rates increased or reduced by a mere presidential decree. But, again,
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The Constitution has one entire chapter (Of the National Tax System
exclusively dedicated to the tax system, which includes provisions for federal,
state and municipal taxes. This chapter contains no less than 14 different
articles with dozens of rules, principles, guidelines, taxpayers’ rights,
limitations, etc. But tax provisions are not limited to the tax system chapter in
19
BRAZIL TAX GUIDE
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WKH&RQVWLWXWLRQDIHZVHSDUDWHWD[UHODWHGSURYLVLRQVFDQEHIRXQGHOVHZKHUH
in the Constitution, such as those dealing with individuals’ rights and the
social security system and taxes.
Social security is also an interesting topic. Although not specifically addressed
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regulated in the social security chapter of the Constitution. That is the case, for
example, of some taxes described in this book, such as CSL and COFINS.
For Brazilian tax purposes, taxes and social contributions are not the same.
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government’s general obligations and duties and do not have a direct public
activity towards the taxpayer, social contributions (contribuições sociais DUH
usually associated with some public activity from the government towards the
taxpayer, whether directly or indirectly. That is the case, for instance, of the
payroll tax paid by individuals and corporate taxpayers to the Social Security;
the tax is destined to cover social security rights of individuals and employees,
such as retirement, maternity leave, labor accidents, public health, etc.
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activity towards the taxpayer. That is the case of the CSL; notwithstanding its
social contribution name (contribuição social sobre o lucro líquido – social
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very similar tax base, rules and very little in terms of public activity towards
taxpayers.
Classification of Brazilian taxes and social contributions is not easy and is
not limited to the two categories above. Scholars still debate the legal nature of
other levies established by the Constitution, but which are not relevant to the
purpose of this book.
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to bypass a constitutional obstacle that requires the federal government to
share revenues from federal taxes with states and municipalities. Because the
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administration is constantly tempted to increase social contributions, leaving
true taxes almost unchanged. Examples of this strategy can be noticed with CSL
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DQG 3,6 FUHDWLRQ RI D QRQFXPXODWLYH UHJLPH ZLWK KLJKHU UDWHV IRU FHUWDLQ
FRPSDQLHV2QWKHRWKHUKDQGLQFRPHWD[UDWHVKDYHEHHQYLUWXDOO\WKHVDPH
IRURYHU\HDUV
The federal tax system is by far the most relevant to taxpayers in general
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DQGPXQLFLSDOLWLHVDOPRVWRIWKHFRXQWU\¶VWD[EXUGHQ
20
David Roberto R. Soares da Silva
The chart below shows the evolution of Brazil’s tax burden in recent years.
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past years, while state and municipal revenues have been practically stable (except
IRU VWDWH UHYHQXHV LQ 7KH UHYHQXH VWDELOLW\ IRU VWDWHV DQG PXQLFLSDOLWLHV LV
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of generating tax revenues. While the Constitution expressly provides means for
the federal government to create new taxes, states and municipalities do not have
such opportunity. Also, the number of taxes constitutionally authorized for states and
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federal taxes expressly contemplated in the Constitution (seven2 ordinary taxes and
at least four3RUGLQDU\VRFLDOFRQWULEXWLRQV
Besides limitations in the number of taxes they can create, states and municipalities
are sometimes limited in terms of the maximum rates they can apply. For instance,
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is 2%. The minimum rate is important because it limits the municipalities’ ability
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attract businesses into their borders.
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&6/3,6&2),16DQGWKHSD\UROOWD[WKHODWWHUUHFHQWO\FRQYHUWHGLQWRDJURVVUHYHQXHWD[IRUFHUWDLQEXVLQHVVVHFWRUVVHH
section CPRB - Social Security Tax on Gross Income
2
3
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VHUYLFH DQG VRFLDO DVVLVWDQFH WR WKH SRRU +RZHYHU GHVSLWH DQ RYHUDOO WD[ EXUGHQ
similar to many developed countries, Brazil still offers public services similar, or
even worse, than its emerging counterparts.
A tax reform would be the natural way to resolve the complexity of the tax
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a reality; no matter how strong the federal government, state governors and state
representatives in Congress would hardly accept waiving their existing rights and
revenues in favor of others. That certainly would be used by their local opponents
and could represent the end of their political careers.
Over the years, many have tried to propose tax reforms: none of them succeeded,
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rates among Brazilians. The latest serious attempt at tax reform was proposed by
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\HDUWKH3UHVLGHQWDQGWKHVWDWHJRYHUQRUVPHWWRGLVFXVVWKHPDLQSRLQWVRIDWD[
reform proposal, which resulted in a letter stating that the tax system should promote
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exports and stimulating production and productive investments.
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transactions, a great source of revenues for producing states, such as the southern
and southeastern states. States without major industries (most of them in the northern
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states with many industries want the tax to be payable to the state of origin.
In May 2003 the Executive Branch submitted to Congress a constitutional
amendment proposal to implement the tax reform. Less than four months later, the
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most of the points originally proposed by the Executive Branch. But as soon as
the proposal reached the Senate, where the Executive Branch could not secure a
majority, problems began to arise with respect to proposed ICMS issues and the tax
reform was never concluded.
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Brazil’s tax system. But because the administration needs to fund its activities, the
only solution is to create new levies and taxes, making the tax system even more
complex. That is exactly what happened after the failure to approve the 2003 tax
reform. COFINS, a gross receipt tax that for years had been regulated virtually by
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22
David Roberto R. Soares da Silva
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historically very simple and straightforward, into the most complicated Brazilian
taxes in terms of rules and regulation.
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and another set of complex rules and regulations was necessary.
The lack of a tax reform caused the government to have very limited room to
create a favorable tax environment generally applicable to new investments. As a
consequence, the only solution was to start creating special tax regimes excluding
certain selected investments from the general tax rules. That is the case of certain
infrastructure projects, exporters, ports, civil construction, aircraft, and automobile
industries, and others better detailed further in this book.
Those special regimes have the disadvantage of not being applicable to all
productive investments in general, but only to those sectors the government, at a
given moment, decides to encourage. They also have the disadvantage of making tax
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23