How are partnerships taxed?
The main corporate taxes in Brazil are the following:
- Corporate income tax (IRPJ): generally, the rates applicable to IRPJ over the corporate profits amount to 15 per cent with a 10 per cent surplus for annual income exceeding 240,000 reais (or for quarterly income greater than 60,000 reais), reaching a total of 25 per cent in most cases.
- Social contribution on net profit (CSLL): generally, CSLL is levied at a rate of 9 per cent on corporate profits.
- Social contribution on revenues (PIS/COFINS). Generally, PIS/COFINS is determined as follows:
- Cumulative system: tax credits on inputs are disallowed. Taxes levied at a rate of 0.65 per cent (PIS) and 3.0 per cent (COFINS).
- Non-cumulative system: credits on inputs are allowed. Taxes are levied at a rate of 1.65 per cent (PIS) and 7.6 per cent (COFINS).
- Excise tax (IPI): this is a value added tax (VAT) levied on the circulation of manufactured goods at a rate that varies from zero per cent to 300 per cent. Tax credits on inputs are allowed.
- Sales tax (ICMS): a state tax similar to VAT levied on the sale of goods and on telecommunication and interstate and inter-municipal transportation services. Tax credits on inputs are allowed. ICMS rates vary by product and are normally levied at 17 per cent to 19 per cent rates. Interstate rates are levied at 4 per cent, 7 per cent or 12 per cent.
- Services tax (ISSQN): a municipal tax levied on services at rates ranging from 2 per cent to 5 per cent. Tax credits are not allowed.
Corporate groups and contractual joint ventures are tax-transparent. Revenues are registered and profits are accrued directly by each partner, which pays its own taxes and complies with its own ancillary obligations.
Consortia and unincorporated partnerships are ‘half-way tax-transparent’, each one in a different manner.
Each member of the consortium accrues its own income and cost proportional to its share or participation in the scope of the enterprise. Accordingly, profits flow directly to each member and each of them pays its share of taxes related to the consortium’s activities as per the same tax system applicable to its own activities. However, some tax obligations may be performed by the consortium itself. For example, where allowed by state or municipal law, invoices may be issued by the consortium at the total amount, instead of being issued by each party thereto; where the consortium directly hires and pays for services, the consortium itself withholds the taxes.
For some federal income taxes and contributions purposes (IRPJ, CSLL, PIS and COFINS), Unincorporated partnerships are taxed separately from their partners, as if they were actual legal entities. They may even adopt different tax systems than their partners. However, their federal tax returns are contained within the ostensible partner’s tax returns. As to state and municipal taxes, there are usually no specific rules for unincorporated partnerships. The ostensible partner invoices clients, pays taxes and complies with ancillary obligations in its own name.
The profits of unincorporated partnerships are distributed to partners the same way actual legal entities distribute profits to their partners: through dividends or interest on net equity. Dividends that arise from profits are not deductible by the paying company and not taxable by the beneficiary partner. Interest on net equity is deductible for the paying company and is subject to withholding income tax at the rate of 15 per cent (including beneficiaries based overseas).Reporting and transparency requirements
To what extent must partnerships, LLPs and similar structures file accounts and other documents and information with a government agency?
As mentioned in ‘Formation (formalities and bars to formation)’, unincorporated partnerships and contractual joint ventures are not required to file their agreements with the Commercial Registry. Third parties are not usually aware of the agreement and accountability occurs only between partners, as agreed upon by them.
Consortia and corporate groups must file their agreements with the Commercial Registry and the certificate of registration must be published. Also, unincorporated partnerships, corporate groups and consortia must be enrolled before the Federal Taxpayer’s Registry.
Additionally, if the corporate group comprises a publicly held company, the agreement must be filed with the Brazilian Securities Commission.
In addition to the financial statements of each of the partners, corporate groups must publish the consolidated statements of the group. If any member is a publicly held company, these consolidated statements must be audited by independent auditors registered with the Brazilian Securities Commission and comply with its rules.
In general, partnerships allow for foreign investments and do not require previous authorisation by the competent authorities. Nevertheless, investments in certain areas, deemed strategic by the Federal Constitution, are either restricted to nationals or subject to government authorisation. A few examples would be financial activities; telecommunication services; nuclear energy; cabotage; activities in international borders and adjacencies - in addition to ownership of rural real estate.
Partnerships must also comply with specific requirements arising from the activities they intend to pursue. For instance, if a consortium is constituted to explore a power generation venture, the consortium or the leading member must obtain all environmental licences, permits specific to the sector and comply with filing and reporting requirements before the competent government authorities.
Further, depending on the structure, it may be necessary to obtain the approval of the Administrative Council for Economic Defense (CADE) before implementation. This will be the case when corporate joint ventures, consortia and associative agreements meet quantitative thresholds established by Brazilian Antitrust Law, that is, gross revenue or volume of business of the parties’ economic groups above 750 million and 75 million reais in the previous fiscal year.
Additional specific rules apply to associative agreements, including contractual joint ventures. CADE’s approval thereof will be necessary for agreements with a duration equal or superior to two years (including renewals), for the joint performance of an economic activity, provided that the risks and revenues therefrom are shared by the parties; and the parties compete in the same relevant market that is the object of the agreement.Ownership and membership
Can anyone be a partner, and, if not, who can and cannot? Can bodies corporate or other partnerships own a partnership?
Both individuals and legal entities can be partners in unincorporated partnerships and contractual joint ventures. Entities without legal personality, such as investment funds, may also take part in contractual joint ventures.
Based on a literal interpretation of the Brazilian Corporation Law, only corporate structures, such as corporations and limited liability companies, can join consortia and corporate groups, thus excluding the participation of individuals, contractual partnerships and other types of legal entities such as associations and foundations. However, some legal experts argue that consortia may also be formed by other types of legal entities - such as non-profit associations.
In general, there are no restrictions for foreign nationals to act as partners, except for investments in certain areas restricted to nationals (as referred to in ‘Reporting and transparency requirements’). Also, the controlling entity of a corporate group must be a Brazilian national.Execution of documents
How do partnerships and LLPs execute documents? Must all partners sign? Can the partnership or LLP sign in its own name?
Rules on partnerships’ administration and representation must be set forth in the relevant agreement.
In unincorporated partnerships, the activity is carried out solely by the ostensible partner, in his or her sole name and under his or her own exclusive responsibility - he or she is the only one having obligations to third parties. The silent partner has obligations exclusively towards the ostensible partner, in accordance with the agreement executed between them. However, if the silent partner takes part in any relations with third parties, he or she will be jointly and severally liable for any losses arising therefrom.
In corporate groups, the agreement should define the administrative structures as well as rules governing decision-making bodies and management. Companies’ representation before third parties, unless otherwise agreed upon by partners, shall fall under the exclusive competence of each company’s officers.
In consortia, partners also agree on representation. It may be determined, for example, that a leading company acts on behalf of the others associates. As a rule, in relations with third parties, consortium members (rather than the consortium itself) act as contracting parties, without joint and several liability, and their obligations are established in the agreement.
Finally, for contractual joint ventures, the representation must follow the rules agreed by the partners in the agreement. In the absence of specific rules in this regard, each partner shall sign, execute documents and undertake obligation in its own name, not having power or authority to bind other partners.