On 13 September 2016 the Brazilian tax haven list ("black list") and privileged tax regime list ("grey list") were amended. In Normative Instruction 1,658/2016 the term "substantial economic activity" was clarified. This clarification is of great importance for the role of Dutch holding companies. Further changes are the inclusion of the Austrian holding regime on the grey list and the inclusion of Ireland on the black list. The amendment shall have retroactive effect as of 1 August 2016.
Dutch holding companies lacking substantial economic activity
On 18 December 2015 the Brazilian tax authorities included Dutch holding companies which lack substantial economic activity on the grey list. Inclusion on the grey list might trigger several adverse tax consequences with respect to both inbound and outbound investments in and from Brazil.
Substantial economic activity
In the amendment of 13 September 2016 the Brazilian tax authorities provided guidance on the term "substantial economic activity". A holding company has substantial economic activity when it has sufficient operational capacity at its disposal in its country of domicile. Indicators for appropriate operational capacity are, among others, employment of sufficient and qualified employees by the holding company itself, and adequate physical facilities for the exercise of management and decision making power in relation to:
- The development of activities in order to derive income from assets it possesses; or
- The management of equity investments with the purpose of obtaining income arising from the distribution of income and capital gains.
Inclusion of Austrian holding companies
The Austrian holding regime was also included without any exception in the grey list. As such, all Austrian holding companies are affected.
The possible tax consequences to be considered in relation to the inclusion of the Dutch holdings without substantial economic activity and Austrian holdings on the grey list are in a nutshell:
- The thin capitalization ratio will be stricter (0.3:1 instead of 2:1) for loans granted by grey listed companies to the Brazilian debtor;
- Additional requirements must be satisfied for the deductibility of payments of any kind made to the grey listed companies (proof of expenses, of the operational capacity and identity of the beneficiary);
- Brazilian transfer pricing rules will apply to the commercial relations between the grey listed companies and any Brazilian party;
- Application of Brazilian CFC rules on grey listed companies;
- Charter payments to grey listed companies, in excess to the threshold limits provided by Law # 13,043/14, will be subject to 25% Brazilian withholding income tax (without considering treaty application).
Inclusion Ireland on black list
The amendment also foresees in the inclusion of Ireland on the black list for Brazilian tax purposes. As such, Ireland is considered to be a low-tax jurisdiction. In addition to the tax consequences mentioned above, a higher withholding tax rate and other tax consequences will apply.
Depending on the specific fact-pattern, there might be certain ways to mitigate the risk that Dutch companies are qualified as Dutch holding companies lacking substantial economic activity and consequently included on the grey list and, more in general, to avoid the adverse tax consequences mentioned above.