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Income Tax in Brazil



Individual - Taxes on personal income:

Residents of Brazil are taxed on their worldwide income, and non-residents are taxed exclusively at source on their Brazilian-sourced income. The source of income is determined by the place where the income payer is located, irrespective of where the work is performed.

For reference, non-resident taxpayers are taxed only on Brazilian-earned income at a flat rate of 25% (no deductions are allowed). Rental income received from a Brazilian-located property is taxed at 15%. Income receive abroad by non-residents is tax exempt.

Personal income tax rates:

Resident taxpayers who receive income from Brazilian sources are subject to withholdings. Resident taxpayers who receive income from non-Brazilian sources (e.g. through split payroll arrangement) or from individuals (e.g. rental income) are subject to mandatory monthly tax payments on amounts not subject to withholdings.

The monthly income tax will be calculated based on the following progressive tax rates (in Brazilian real or BRL) as of April 2015:

Income (BRL)
Tax Rate (%)
At or Over
Up to

0
1,903.98
Exempt
1,903.99
2,826.65
7.5
2,826.66
3,751.05
15.0
3,751.06
4,664.68
22.5
4664.68
And Above
27.5
           
Alternative income taxes:

In December 2012, the Brazilian authorities issued PM 597/2012, converted into Law 12,832 (20 June 2013), altering Law 10,101/2000, which regulates profit sharing distributed to employees. The referred law established new rules, as follows:

A new specific progressive table applicable only for profit sharing paid by companies to its employees, which is valid as of April 2015:

Annual Profit Sharing (BRL)
Tax Rate (%)
0 to 6,677.55
0
6,677.56 to 9,922.28
7.5
9,922.29 to 13,167.00
15.0
13,167.01 to 16,380.38
22.5
Above 16,380.38
27.5

·        The possibility for the employee to use the alimony paid as a deduction from the profit sharing or from the regular salary.

·     The periodicity of payment must be twice a year, considering a minimum period of three months between the payments.

Income determination:

Employment income:

Taxable compensation includes everything that is either directly or indirectly connected with the work and/or assignment remuneration package, including salary, premiums, bonuses, allowances of any kind, tax reimbursements, club dues, and company-owned cars.

Equity compensation:

The income tax on stock options is due by individual residents in Brazil on the positive spread between the grant price and the fair market value at the time of exercise as well as upon the sale of the shares, where the sale results in a capital gain. Further implications must be observed in case the costs are recharged to the Brazilian entity.

Business income:

Income arising from work without an employment relationship, when paid by legal entities and cooperatives, is subject to income tax withheld at source based on the progressive table mentioned in the Taxes on personal income section.

Dividend income:

Dividend income received from Brazilian companies, relating to profits derived from 1996 onwards, is tax exempt. Dividend income received from investments made abroad, however, is subject to monthly income tax payments.

Interest income:

Interest income received from Brazilian investments is subject to income tax withholding at source. The tax rate ranges from 15% to 22.5%, depending on the term of the investment.

Exempt income:

Among other items, the following are exempt from any income tax:

·        Meals, transportation, and special work uniforms or clothing supplied by the employer free of any charge or the difference between the amount charged and their market values.
·        Per diem allowances to cover room and board for working outside the county in which the company or office is based or in which the work is normally performed.
·          Labour indemnities, limited to the legal amounts, including indemnities for labour accidents.
·      Contributions made by the employer to private social security programs in favour of the employee, provided certain requirements are met.
·      Reimbursement of relocation costs when moving to a different county at the request of the employer, provided some requirements are met.
·         Severance Indemnity Fund (Fundo de Garantia por tempo de Serviço or FGTS).

Individual – Residence:

First of all, it is important to emphasise that the ‘New Migration Law’ (Law 13.445 issued in May 2017) has formally revoked the ‘Foreigner Statute Law’ (Law 6.815/1980) and created new types and characteristics for allowable visas, extended the coverage conditions for the temporary visa, and introduced a new authorization for residence.

The implementation of the new changes introduced by the 'New Migration Law' will depend on the issuance of regulations by the local authorities, specifically with respect to the procedures for visa issuances, as well as it will impact the current individual tax residence rules with respect to foreign individuals in Brazil.

Notwithstanding the above, until the new regulation is not issued by the Brazilian authorities, the following individuals are considered residents for Brazilian income tax purposes:

·           Brazilian citizens living in Brazil.
·      Brazilian residents living abroad for the first 12 months subsequent to their departure (in cases where no exit process is filed).
·          Naturalised foreign nationals living in Brazil.
·       Foreign national holders of permanent visas and holders of temporary work visas under an employment contract with a Brazilian entity, as of the date of entry to Brazil with such visas.
·        Individuals who enter into Brazil under a temporary visa to work as a doctor under the program 'Mais Médicos' on the date of arrival.
·        Foreign nationals holding temporary visas without an employment contract with a Brazilian entity, after completing 183 days of actual physical presence in Brazil (consecutive or not) within a 12-months period.
·        Nationals from Mercosul States (Argentina, Paraguay, and Uruguay), as well as from Bolivia, Chile, Colombia, and Peru, who claim temporary residence on the date the work relationship is established or on the date permanent residence is achieved.

The following individuals are considered non-residents for Brazilian income tax purposes:

·        Brazilians living abroad, as of the date of departure (if the exit process has been filed).
·        Brazilians living abroad, after 12 months of departure (if the exit process has not been filed).
·        Foreign nationals holding temporary visas without an employment contract with a Brazilian entity, during their first 183 days of actual physical presence in Brazil (consecutive or not) within a 12-months period.




Tax administration:

Taxable period:

The Brazilian tax year covers the period from 1 January to 31 December.

Tax returns:

Residents must file a tax return annually by the last business day of April of the following year, and no extension of time is allowed. In case of a late filing, penalties will be assessed by the tax authorities.

Since individual income tax is due and payable monthly, this return will account for only minor tax adjustments and will serve to list assets and liabilities. While there is no tax on assets owned, the government uses the list to check if the increase in the taxpayer's net worth is compatible with the reported income.

Spouses may elect to file tax returns jointly or separately. If filed separately, income received jointly must be allocated to each spouse's return. Also, in the section pertaining to assets and liabilities, each spouse must show the corresponding items held individually. The value of jointly held assets/liabilities should be allocated according to ownership percentage or shown only on one spouse's return. The spouse not listing the jointly held assets/liabilities must declare that the items will be listed on the other spouse's tax return.

The head of a household may treat as a dependant a spouse or any dependant (up to 24 years old who fulfils the dependant's rules) who receives taxable income, since the pertinent amounts are included in the income tax calculation basis.

Payment of tax:

Income tax is normally withheld at source, at rates varying from 0% to 27.5%, depending on the income bracket. The final liability is determined upon filing the tax return. Any difference between the amounts as determined by the tax return and that withheld at source or paid during the year by the individual must be paid or is refunded to the taxpayer. In case of any tax due, it must be paid to the Brazilian tax authorities at once or through up to eight monthly instalments, due on the last business day of April and in the succeeding months. In case the tax due is paid in instalments, interest must be considered monthly.

Taxes due on taxable capital gains arising from the sale of property must be collected through a tax voucher on or before the last working day of the month subsequent to sale in the case of resident taxpayer, or on the same day of sale in the case of a non-resident taxpayer.

If paid in Brazil, dividends are exempt from taxes whereas interest and royalties are taxed at source. If paid abroad, dividends and royalties are subject to taxation through the mandatory monthly income tax calculation whereas interest is taxable as capital gain. In both cases, the taxes due must be collected through a tax voucher on or before the last working day of the month subsequent to when the income was earned.




Taxes on corporate income:

Brazilian resident companies are taxed on worldwide income. Non-resident companies are generally taxed in Brazil through a registered subsidiary, branch, or PE, based on income generated locally. Other than that, non-resident companies can be subject to withholding tax (IRRF) on income derived from a Brazilian source.

Corporate income tax (IRPJ) is assessed at the fixed rate of 15% on annual taxable income, using either the 'actual profits' method or the 'presumed profits' method.

Surcharge:

Corporate taxpayers are also subject to a surcharge of 10% on the annual taxable income in excess of 240,000 Brazilian reais (BRL).

Social Contribution on Net Income (CSLL):

All legal entities are generally subject to CSLL at the rate of 9% (except for financial institutions, private insurance, as well as certain other prescribed entities, which are taxed at the rate of 20%), which is not deductible for IRPJ purposes. The tax base is the profit before income tax, after some adjustments.

Income determination:

Brazilian taxpayers are subject to IRPJ and CSLL using an ‘actual profits’ method (‘Lucro Real’), which is based on taxable income (book results before income taxes), adjusted by certain additions and exclusions as determined by the legislation.

Subject to certain restrictions (where gross income does not exceed BRL 78 million), Brazilian taxpayers have the option to calculate IRPJ and CSLL using a ‘presumed profits’ method (‘Lucro Presumido’). Under the ‘presumed profits’ method, the income is calculated on a quarterly basis on an amount equal to different percentages of gross revenue (based on the entity’s activities) and adjusted as determined by the prevailing legislation.

Inventory valuation:

Brazilian income tax regulations require that inventory may be valued at the actual average cost or by the cost of the most recently acquired or produced goods. Rulings to the effect that last in first out (LIFO) is not acceptable have been given. With the introduction of the public digital bookkeeping system (SPED), the RFB should have access to the productive process and inventory movement of companies.

Capital gains:

Capital gains derived from the sale of assets and rights, including shares/quotas, are generally taxed as ordinary income.

Carried forward capital losses may be offset only against capital gains. Unused capital losses are treated similarly to income tax losses with regard to limits on use and carryforward period. Capital losses may be used to offset other operating income in the year that they are incurred.

Capital gains derived by non-residents (including transactions carried out abroad between two non-resident investors, involving assets or rights located in Brazil) may be taxed in Brazil.

As of 1 January 2017, new rates are in force. Law 13,259/2016 has established progressive income tax rates, which range from 15% (for capital gain that does not exceed BRL 5 million) to 22.5% (for the portion of the gain that exceeds BRL 30 million), as per the table below:

Capital Gain (BRL)
Income Tax Rate (%)
Over
Not Over

0
5 Million
15.0
5 Million
10 Million
17.5
10 Million
30 Million
20.0
30 Million

22.5

For beneficiaries residing in tax haven jurisdictions, the rate applicable remains at 25%, irrespective of the amount of the gain, due to an explicit provision in the law for these situations.

Prior to 1 January 2017, the Brazilian source performing the remittance of capital gains to the non-resident (whether a Brazilian acquirer or the local representative of a foreign acquiring entity) had to withhold the applicable income tax on such amounts on behalf of the latter at rates of 15% (or 25% if the beneficiary was located in a tax haven jurisdiction).

Exemptions from capital gains taxation may be available for specific transactions (e.g. certain regulated investments on the Brazilian stock market).

Dividend income:

In general terms, no IRRF is due on cash dividends or profits paid or credited to either corporate or individual shareholders. Brazilian resident beneficiaries are not subject to further income tax on receipt of dividends.

Financial income:

Fixed-rate interest income from short, medium, or long-term financial market transactions, including swap transactions, is subject to IRRF at rates ranging from 15% to 22.5%. Non-fixed financial gains related to stock/commodities exchange and/or futures market transactions are taxed at rates of 20% (day-trade) and 15% (all other cases). For legal entities, the total income or gain is considered taxable income, and the tax withheld may be offset against the total tax due by the corporate taxpayer.

Additionally, PIS/COFINS may be levied at a rate of up to 4.65%, depending on the type of transactions and taxation regime (i.e. non-cumulative method).

Royalty income:

Under Brazilian tax legislation, royalties are defined as the remuneration agreed between contracting parties for the use or exploration of:

·        industrial property rights (i.e. patents, trademarks, brand names, and other rights of the same nature)
·     know-how (sharing of technical information, necessary for the industrial manufacturing of a product or process, deriving from experience previously acquired), and
·        copyrights.

Deductibility of royalty payments is conditioned to the proper registration of the contract and limited to a percentage varying from 1% to 5% of the corresponding net sales revenues.

The payment of royalties to companies abroad is generally subject to IRPJ (15%), CIDE (10%), and IOF (0.38%).

Foreign currency exchange gain/loss:

With respect to foreign currency exchange gain/loss, which may arise from receivables or liabilities denominated in foreign currency, Brazilian tax legislation allows the local company to elect to consider the related effect, for tax computation purposes, either upon an accrual or cash basis (i.e. actual receipt/payment of funds).

Foreign income:

Brazilian resident companies are taxed on worldwide income.

Corporate residence:

A legal entity is considered resident in Brazil if it has been incorporated in Brazil, and its tax domicile is where its head office is located.

Permanent establishment (PE):

The specific term ‘permanent establishment’ is not included in the Brazilian legislation, rather there is a concept of ‘taxable presence’.

In general, a non-resident company may be treated as having a taxable presence if it operates in Brazil either through: (i) a fixed place of business or (ii) an agent who has the power to enter into contracts in Brazil in the name of or on behalf of the non-resident.




Corporate - Tax administration:

Taxable period:

For tax purposes, a company’s year-end is 31 December. A different year-end for corporate/accounting purposes is irrelevant.

Tax returns:

With few exceptions, corporate entities, including those that are foreign-controlled, must file an annual tax return consolidating the monthly results of the previous calendar year. This tax return must normally be filed by the end of July following the tax year ending on 31 December.

Supporting documentation must be retained for at least five years.

Please note that there are a number of other declarations/returns imposed by the RFB, for different taxes, at federal, municipal, and state levels, which make the tax administration in Brazil notably bureaucratic.

Payment of tax:

In the case of income tax, it is calculated monthly, and payments should generally be collected and paid by the last working day of the subsequent month. Any amounts of income tax due for the year (exceeding the payments performed) must be paid by the last working day of March of the subsequent year.

There is an option to pay the tax due at the end of each quarter in three instalments, the first one starting from the subsequent month to the end of the quarter. When income tax is calculated quarterly, the taxpayer must perform the applicable payment by the last working day of the month subsequent to the end of the quarter.

There are many other taxes applied in Brazil with different due dates established by the domestic legislation.

Tax audit process:
As all tax returns are digital, they may be selected for audit by computer, according to various criteria, including type of business, unusually large or small amounts of income or deductions, and random sampling.

No corporate entity, whether a taxpayer or not, is excused from furnishing information or explanations required by the tax authorities.

When audits are conducted on the premises of taxpayers, tax inspectors have broad powers to inspect books and documents and to request information and any data deemed necessary. This is generally disrupting and, in practice, every effort is made to expedite the conclusion of these audits.

Whenever a violation is determined during a tax audit, the inspectors must draw up an infringement notification, which starts the administrative procedure for additional tax assessments.

It should be noted that, in case of doubts regarding the correct tax procedure to be adopted in a specific situation, taxpayers are allowed to consult with the RFB; however, the results of the consultations only bind the respective taxpayers.

Statute of limitations:

The tax authorities may generally audit taxpayers up to five years after the close of the tax year. There is some debate about the moment this five-year period begins, depending on the type of tax considered and certain situations.



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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.