In brief

On 30 September 2015, the Executive Branch of the Brazilian government released a Provisional Measure 694/2015 (PM 694), which was supposed to add a new deductibility limitation for interest on net equity (INE) for Brazilian income tax and social contribution tax purposes, and which additionally sought to increase the income tax withholding rate on INE payments to non-resident shareholders. However, due to lack of action by the Brazilian Congress to convert the provisions of PM 694 into law (in its existing form or with amendments), the PM expired as of 9 March 2016. The expiration was confirmed by a notice released by the Brazilian Senate on the same date.

Hence, as for now, the Brazilian INE rules remain unchanged. However, as it is possible that the proposed amendments will be reintroduced in a future PM, multinational companies that own Brazilian entities should continue to monitor developments related to INE payments.

Content of PM 694

Brazilian-resident companies currently have the option to compute and pay notional interest to their shareholders based on the company’s net equity as reflected in its local statutory books. Currently, this notional interest, known as INE, is calculated by multiplying the company’s adjusted net equity amount by the long-term interest rate (TJLP) set by Brazil’s National Monetary Council. INE is generally deductible for Brazilian income tax and social contribution tax purposes to the extent it does not exceed the greater of (i) 50 percent of the payor’s annual profits, or (ii) 50 percent of its accumulated retained earnings.

Payments of INE to non-resident shareholders are subject to 15 percent income tax withholding when the shareholder is not located in a blacklisted tax haven jurisdiction (or 25% when the shareholder is resident in a blacklisted tax haven).

PM 694 sought to increase the existing INE deductibility limitations by limiting maximum deductible INE to the lower of the company’s adjusted net equity multiplied by (i) the applicable TJLP rate, or (ii) an annual rate of 5 percent.

Additionally, the PM sought to increase the income tax withholding rate on crossborder INE payments from 15 percent to 18 percent, when the shareholder is not located in a blacklisted tax haven jurisdiction. The 25 percent withholding tax rate would continue to apply for INE payments to residents of blacklisted tax havens.

As a PM issued by the Executive Branch of the Brazilian government, the provisions of the PM 694 took effect on its date of publication (September 30, 2015). Such provisions are generally in effect for a 60-day period, and expire unless the Brazilian Congress takes action. Specifically, the provisions of a PM must be converted into law, in its existing form or with amendments, by the Brazilian Congress within this 60-day period (which the Executive Branch may extend for one additional 60-day period). If the Brazilian Congress does not act within this period (or the extended period if applicable), the PM will expire.

What does this mean for Swiss corporations?

It should be noted that although Switzerland is no longer considered as a tax haven, certain Swiss tax regimes are still considered as “privileged tax regimes” for Brazilian tax purposes. Hence even though the Brazilian INE rules remain unchanged, Swiss corporations that own Brazilian entities or intend to expand their business to Brazil should continue to carefully analyse and monitor the impact resulting from INE payments and any other adverse tax consequences resulting from acquisition or divestments in Brazilian entities.