Earlier this month, Brazil’s Federal Revenue (RFB) released Normative Instruction RFB No. 1,658, which amended Normative Instruction RFB No. 1,037/2010 to:

  • in the list of countries or locations classified as low-tax jurisdictions (tax havens): (i) include Ireland; (ii) replace Netherlands Antilles with Curacao and St. Martin, given the dissolution of Netherlands Antilles and creation of the referred jurisdictions; and (iii) exclude St. Kitts and Nevis, as they were in duplicate with the Federation of Saint Kitts and Nevis;
  • in the list of privileged tax regimes: include holding companies in Austria.

Additionally, as regards the classification as privileged tax regimes of holding companies in Denmark and Netherlands with no substantial economic activity − which were already included in the original list of Normative Instruction RFB No. 1,037/2010 − Normative Instruction RFB No. 1,658/2016 has clarified that a holding company is deemed to have "substantial economic activity" when, in its residence country, it presents an operational capacity suitable to its purpose, evidenced, among other factors, by the existence of skilled employees in sufficient number and adequate facilities for management and effective decision-making relating to:

  • the development of activities aimed at obtaining income derived from its assets or
  • the management of the equity stake aimed at obtaining income arising from the distribution of dividends and capital gains.

Normative Instruction RFB No. 1,658 was published in the Official Gazette on September 14, 2016.

The draft previously provided by RFB on economic substance requirements of holding companies in Denmark and Netherlands has been amended. As per Normative Instruction RFB No. 1,658/2016’s provisions, in order to identify the existence of economic substance, RFB is focusing more on activity carried out by the holding company (rather than its corporate format) and on the list of exemplificative requirements (which, in the draft previously provided, was indicated only in explanatory notes). Nevertheless, RFB has not expressly included the international standard requirement related to assumption of economic risks, although this condition was also indicated in the explanatory statement.

Please note that, with respect to Austrian holding companies, these are deemed to be privileged tax regimes, regardless of the existence of economic substance.

The amendments introduced by Normative Instruction RFB No. 1,658/2016 are effective from October 1, 2016 (as published by RFB rectification on September 19, 2016).

It is worth noting that the classification of a country or location as a tax haven (which comprises jurisdictions that do not tax income or tax it at a rate below 20 percent, or where domestic law does not allow access to information related to shareholding composition) or as a privileged tax regime has, among others, the following legal consequences: (i) application of transfer pricing and thin capitalization rules; (ii) differences in tax treatment regarding overseas profits; and (iii) application of an increased withholding income tax rate of 25 percent on payments on interest, services, royalties, etc. (usually applied only to tax havens, except for some legal express provisions extending it to privileged tax regimes).

Note that dividends are tax free even when paid to a shareholder located in a tax haven.


*Alex Jorge and Humberto Marini are partners in the Tax practice of Campos Mello Advogados, an independent law firm in Brazil.