This is the fourth article relating to the subject of Brazilian income tax withheld on commercial aircraft lease payments ("withholding tax").
Until 2019, considering the strategic importance of aircraft leasing to Brazil's economic development, withholding tax was due but at the rate of 0%. The usual default rate of withholding tax on cross-border leases to Brazilian lessees for any asset (aviation or non-aviation) is 15%.
From 2019, the Brazilian government set and reset the applicable laws and rates a few times (see "Withholding tax provokes widespread lease defaults", "Withholding tax on aircraft lease rentals – new rules finalised" and "Changes in Brazilian withholding tax"). The last reset of May 2020 did not expressly address the applicable rate due from 1 January 2021, which meant that the applicable rate for some or all of 2021 may have been the default rate of 15%. During most of 2021, there was considerable uncertainty as to the then applicable rate of withholding tax on commercial aircraft leases and the future rates. The rate of 15% is economically unsustainable for Brazil's airlines, which bear several other high tax burdens.
This issue has not affected non-commercial operators. Provided such operators lease aircraft from lessors that are not domiciled or based in jurisdictions considered "tax havens" by the Brazilian tax authority (SRF), those payments are not subject to withholding tax.
On 31 December 2021, the Brazilian president signed Executive Order 1094 (the executive order), altering withholding tax on aircraft rent payments. The new rates are the result of negotiations between the airline sector and government and are as follows:
- for lease payments made during calendar year 2022 – 0%;
- for lease payments made during calendar year 2023 – 0%;
- for lease payments made during calendar year 2024 – 1%;
- for lease payments made during calendar year 2025 – 2%; and
- for lease payments made during calendar year 2026 – 3%.
These terms became effective immediately as of 1 January 2022. However, the Brazilian Congress must approve them within 60 days. If Congress does not act during the first 60 days, the executive order remains effective and there is an automatic extension of another 60 days. If the Congress does not approve the terms of the executive order within 120 days, it loses effect and the prior rules again become effective.
Congress can amend the executive order during its deliberations. If this occurs, the president would have to approve the changes. Congressional changes occurred in 2020 and the president vetoed some of them, causing some of the confusion of the past year.
The executive order does not attribute relevance to certain criteria that appeared to be relevant under laws which were applicable in 2020 and 2021. For example, the date on which a lease agreement was executed is not mentioned in the new executive order. Therefore, these rates appear to apply to all leases, regardless of when they were executed. The language of the executive order refers to the time that payments are remitted. This should result in payments made at any time during 2022 and 2023 being subject to the rate of zero, regardless of when they fell due. In addition, the executive order refers to lessors located outside Brazil, without mentioning whether the lessors are located in jurisdictions deemed to be tax havens by the SRF. Thus, the location of the lessor should not have any relevance in the tax treatment.
The executive order reasonably balances the relative interests of the airlines and the government and, if approved by Congress, will remove most of the uncertainty that has shadowed the entire sector for the past two years, leaving many industry participants, airlines, lessors and other financiers uncomfortable. After Congress considers the executive order, that uncertainty should be diminished – at least until 2027.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3065 4455) or email ([email protected]). The Basch & Rameh website can be accessed at www.baschrameh.com.br.