It was published in the Official Gazette of August 18, 2017, with a republication dated August 21, 2017, the Decree No. 9,128/2017 (“Decree”) and the Provisional Measure No. 795/2017 (“MP 795/17”), which have modified the provisions of the tax legislation in regard to the exploration and production of oil and natural gas in Brazil. We will provide below our analysis of the main alterations thereunder.

It is noteworthy that MP No. 795/17 is a provisional measure, subject to approval by the House of Representatives for a consequent conversion into law and, therefore, it may still be altered or even rejected.

1) Main provisions of the Decree:

1.1) REPETRO extension until 2040

It was extended, until December 31, 2040, the special customs regime for export and import of assets destined to research activities and production of oil and Natural Gas (“REPETRO”).

1.2) Previous REPETRO regime

Assets admitted under the previous REPETRO regime will remain subject to the rules applicable prior to Decree No. 9,128/2017, unless the taxpayer opts to proceed with its transference to the new rules.

1.3) Extension of the temporary admission regime for economic use, with total suspension of taxes applicable on the importation of regasification units.

It was extended, until December 31, 2040, the temporary admission regime for economic use, with total suspension of the import taxes which are typically imposed over the importation of assets to be used on activities of transportation, movement, transference, storage or regasification of liquefied natural gas, included under a list to be issued by the Federal Revenue Services (“RFB”).

In this regard, it is expected that the RFB shall enact a new Normative Ruling modifying the provisions of Normative Ruling No. 1,600/15, on this particular subject.

1.4) RET under the definitive import of goods

The MP 795/2017 also provided a new special customs regime, which shall provide total suspension of the federal taxes which are typically imposed over the definitive importation of assets used under activities of exploration, development and production of oil, natural gas and other fluid hydrocarbons.

2) Main Provisions of the MP 795/2017

2.1) Deduction of expenses with activities of exploration and production of oil and natural gas (to be enforced from January 01, 2018)

It was included a possibility for total deduction of IRPJ/ CSLL from the amounts used on activities of exploration and production of oil and natural gas (art. 1, caput).

The RFB understands that the costs incurred with research for the purposes of oil production were already subject of deduction, as per art. 53, § 1º of Law No. 4.506/64.

2.2) Inclusion as an asset and subsequent accelerated depletion of expenses in activities related to the development of oil and natural gas fields (to be enforced from January 01, 2018)

It was reinforced (now upon express legal provision – i.e. art. 1, §1) the understanding applied by the RFB which states the expenses with development of fields, necessary to enable the production of oil or natural gas, shall be included as assets, with due authorization of deduction of such depletion expense for purposes of IRPJ/ CSLL.

Alternatively, it was introduced the option for implementation of accelerated depletion of assets existing until December 31, 2022, calculated upon the application of the depletion rate, determined by the method of produced units, multiplied by 2,5% (art. 1, §2). The accelerated depletion shall be executed upon the exclusion of the net profit and shall have the cost of the asset as its limit.

Please note that there is still controversy on this matter, due to the taxpayers’ understanding that the such costs should be deducted as operational expenses, in view of the non-obligation of to treat them as assets and/ or art. 416 of RIR/99 (art. 12 of Decree-Law No. 62/1966), which should not benefit only the previous state owned oil and gas company of the sector, but also its competitors after the end of the oil monopoly regime by the Brazilian Government.

The RFB, however, considers that such revenues shall be deemed as assets and deducted in the subsequent periods, due to the fact that the provisions of art. 12 of Decree-Law No. 62/1966 (art. 416 of the RIR/99) are not enforceable anymore, considering that the end of the state monopoly upon the sector has resulted on the unconstitutionality of such rule.

In this sense, we highlight that, on March 2017 (decision No. 1402-002.419), CARF decided against the assessment that required an oil and gas company to pay IRPJ/CSLL due to the write-off of certain expenses incurred under an oil field’s development phase, concluding that such expenses should be treated as operational expenses (art. 299 of RIR/99). In that particular case, the taxpayer accounted such expenses as assets and proceeded with their total deduction, based on art. 416 of the RIR/99.

The MP has now regulated the subject, revoking art. 12 of Decree-Law No. 62/1996.

2.3) Inclusion as asset and subsequent deduction of equipment on activities related to the development of production (to be enforced from January 01, 2018)

Machines, equipment and ancillary goods used under activities for development or production of oil fields shall be included as assets and deducted from the IRPJ/CSLL as depreciation expenses, according to the rates periodically published by the RFB or any other applicable rate (duly proved) to the use of such assets.

Please note that the abovementioned rule follows the procedure typically applicable for assets in general

2.4) Modifications of the rules related to contractual split (to be enforced from January 01, 2018)

The separate agreements for charter or lease of vessels and provision of services – the so-called split of contracts. Under which the vessel is imported under an agreement, entered into with a foreign company, whereas the services onboard – related to the exploration and production of oil or natural gas – are rendered by a Brazilian company, usually part of the same economic group.

The RFB has historically considered such segregation of contracts as an abusive tax planning, having the sole aim to enhance the amount of receipts remitted abroad under the charter/ lease agreement, which are be subject to the WHT at zero percent rate.

There are still controversies about this matter, as the RFB understands that the foreign company provides technical services, which are typically taxed by the WHT and CIDE-technology (CARF has case law corroborating this understanding). The RFB has also assessed Brazilian companies, under the argument that the split structure was entered to shift revenues into the charter/ lease agreement, and, as a consequence, eroding the tax basis for corporate income tax purposes. 

Aiming to solve such uncertainty on the division of income’s percentages on each of the aforementioned agreements, back in 2014, a regulation was enacted stablishing the split percentages accepted by the RFB for tax purposes.

Now, the Brazilian Government intends to introduce new rules regarding the split structure, especially regarding the acceptable revenue split percentages.

2.4.1) New split percentages (to be applied from January 01, 2018) and its taxation

The Explanatory Statement of the MP 795/17 indicates that such alteration is a consequence of an economic unbalance in the current applicable percentages, which does not follow the patterns adopted by other countries, not providing, however, any further details about the matter.

Therefore, as of January 01, 2018, new percentages will be adopted for the application of the WHT at zero percent rate upon the charter/lease of vessels to be used for the exploration and production of oil or natural gas. We will provide below, in a comparative manner, the percentages applicable until December 31, 2017 (reaffirmed under the MP 795/17) and the new percentages to be applied from January 01, 2018:

Split Percentages – until December 31, 2017

Split Percentages – to be applied from January 01, 2018

85% -  Floating Production Systems Vessels – FPS

70% - Floating Production Systems Vessels – FPS

80% - vessels for drilling, completion and maintenance of fields (drilling rigs)

65% - vessels for drilling, completion and maintenance of fields (drilling rigs)

65% - other vessels

65% supply vessels, as defined by Law No. 9.432/97

65% - other vessels

50% - other vessels


The MP 795/17 also established that the non-observance of such percentages will result on the WHT of 15% upon remittances on the parcel of the agreement which surpass the percentage indicated for the type of vessels, if the foreign company is located in a country of regular taxation.

However, in our opinion it is not totally clear the WHT on the boat charter or lease agreement exceeding the pre-fixed percentages in case of remittances to a favorable tax jurisdiction or subject to a privileged tax regime under Normative Ruling No. 1,037/2010.

By interpreting such provision literally, one may conclude that the higher tax rate of 25% only applies on the total amount if it exceeds the pre-fixed percentages, and that the zero rate WHT applies on the amounts of the agreement that stays within the established limits, even in case of remittances to a favorable tax jurisdiction or subject to a privileged tax regime.

Moreover, the possibility of applying the higher WHT rate to payments to legal entities subject to privileged tax regimes is at least questionable, since until this time, there is not a general rule establishing the 25% WHT in such remittances (the opposite of what occurs with remittances to favorable tax jurisdictions). In any case, even if the intent of the new provision was to create another event subject to the increased WHT rate, it may only be applicable for this specific type of payment.

When it comes to the Split between the charter or lease of vessels and the services provision related to the transportation, movement, transference, storage and regasification of liquefied natural gas (LNG), entered between related companies, the WHT at zero rate for the charter/ lease will be limited to 60% of the agreement’s total amount.

It was not included a specific link between the aforementioned LNG case of split to the rule of tax heaven and privileged tax regime specified above. Such aspect might be clarified in a possible conversion of the MP 795/17 to law.

It was included a provision stating that the agreements observing the split in place (before and after December 31, 2017) cannot be disregarded (nature and conditions) for tax purposes aiming the application of CIDE-technology and PIS/COFINS-import (goods and services).

In this regard, we believe that any non-compliance with the required split percentages would not cause the automatic disregard of the agreements as a whole, but in this case, it is important that the transactions have substance and economic rational.

The precedence principle (“anterioridade”) of the WHT was respected, but there is no express rule regarding the applicability of the previous regime to the agreements entered or reformulated based on the current split rules, which could cause a controversy regarding the application of the new percentages of WHT reduction to such cases. The main arguments against the application of the new rules for these cases would be related to the need for guarantee of the required legal certainty, and due to the fact that there are different agreements, with different parties.

2.4.2) New definition for related-parties for purposes of the split (to be applicable as of January 01, 2018)

It will also be modified the perception of related-parties for split purposes. The current legislation defines as related-parties the foreign charterer company of the vessel and the company which render the services, in Brazil, in situations where such companies are direct or indirect shareholders of the company owner of the chartered/ leased vessel. However, it was introduced an extension to this concept, so that the foreign company shall be considered as related to the services provider company when:

  1. It is its parent company, a branch or subsidiary;
  2. The corporate participation on its corporate capital of one company in relation to the other characterizes it as its holding or affiliated company, as provided by the Corporation Law;
  3. Both are under the same corporate control or common administration, or when at least 10% of the corporate capital of each one is owned by the same individual or company;
  4. Together with the company domiciled in Brazil, it has participation on the corporate capital of a third company, provided that the sum of the participations characterize them as holdings or affiliated companies of such third company, as provided by the Corporation Law; and
  5. It is its partner in a consortium or condominium, as provided by the applicable legislation, in any enterprise.

2.5) CFC Rules

The rules regarding profits gained abroad introduced the exclusion of taxation of IRPJ/CSLL upon the profit of the holding or affiliated company, with bareboat or time charter activities, operational charter, lease, loan of goods or services provision directly related to the exploration and production of oil and gas, in the Brazilian territory. This provision exists to guarantee the efficiency of the zero WHT rate upon such remittances.

The exclusion of taxation was maintained, but with express inclusion of a temporary limitation of such benefit, in view of the provisions of the Budget Law of 2013, which reduces such waivers to a term of 5 years.

2.6) WHT installment plan ( triggering events until December 31, 2014) upon charter/ lease which did not observe the Split percentages

In view of the RFB’s understanding –which considered that the remittances under the charter/lease agreement should be treated as technical services, which ultimately resulted in litigation regarding the split structure –, together with the need to increase the government take, MP 795/17 provided for a specific installments regime for WHT, related to triggering events until December 31, 2014, due upon charter/ lease agreements that did not followed the split percentages, which are in force until December 31, 2017. Please note that the CIDE-technology and PIS/COFINS-import were not considered for this installment plan, though.

Such WHT debt shall be paid:

  1. Added by SELIC interest;
  2. Without penalties, due to a 100% reduction of the late penalty fine (up to a limit of 20%) or the punitive penalty (“multa de ofício”) (of a 75% or 150%), as the case may be; and
  3. Without attorney fees, in case of total termination of lawsuits.

The payment of such WHT debt can be made:

  1. In one single installment on January 2018; or
  2. Up to 12 (twelve) monthly, equal and successive installments, being the first installment due on January 31, 2018 and the others in the last business day of the following months. In this case, the parcels will be added of a SELIC Rate accumulated from February 01, 2018 until the last day of the month preceding the payment, as well as of 1%  on the month of payment.

The adherence is subject to the proof of express and irrevocable withdraw of administrative and court proceedings which has as its object the WHT debt, added of the resignation of any claim related to those proceedings.

In case of incorporation, merger, split or extinction of the company, the maturing installments shall be paid until the last business day of the month following the special event.

2.7) RET to import on a definitive basis (until July 21, 2022)

MP 795/2017 introduced a special customs regime to import on a definitive basis, with suspended federal taxes, goods to be used for activities of exploration, development and production of oil, natural gas, and other fluid hydrocarbons.

The suspended federal taxes are (i) Import Tax (“II”); (ii) Excise Tax (“IPI”); and (iii) PIS/COFINS-Import).

After elapsed five years counted from the date of registration of the import, the suspension of the II and IPI is converted to a tax exemption and the suspension of the PIS/COFINS-Import is converted to a zero tax rate.

In case the taxpayer proceed with the importation with suspended federal taxes and do not use the imported good in the applicable manner (activities of exploration, development and production of oil, natural gas and other fluid hydrocarbons) within three years, counted from the date of registration of the import, it will be subject to the payment of the suspended taxes, plus interest and penalties, calculated from the date of the taxable event. The aforementioned term can be, exceptionally, extended for up to 12 (twelve) months by the RFB.

The ICMS-Import (State level) shall not be included in the suspended taxes provided by the MP, and its suspension, tax exemption or reduced rate will rely on local legislation.

Finally, the MP 795/17 delegated the regulation of the aforementioned regime to the Executive Power.

2.8) Suspended federal taxes on the importation or acquisition in the internal Market (until July 31, 2022)

It was established the suspension of federal taxes on the importation or acquisition in the internal market, of raw material, intermediary products and packages to be used only on the process for production of the final product to be applied on activities of exploration, development and production of oil, natural gas and other fluid hydrocarbons, until July 21, 2022.

The suspension of one year (to be extended for a maximum term of 5 years, unless for exceptional cases) is applicable to II, IPI, PIS/COFINS-Import and PIS/COFINS.

The destination of the acquired good to the final product will result on the tax exemption of II and IPI and on the 0% rate of PIS/COFINS and PIS/COFINS-Import.

The acquisition of the final product will be performed with the suspension of PIS/COFINS and IPI, resulting, respectively, on the zero tax rate and tax exemption when implemented the final destination of the final product to activities of exploration, development and production of oil, natural gas and other fluid hydrocarbons.