The Brazilian Federal Revenue Office ("RFB") issued, on September 17, 2013, Normative Ruling No. 1,397/13, which sets forth the rules that must be observed by legal entities subject to the Transitory Tax Regime ("RTT"), introduced by Law No. 11,941/09.
We highlight that, among other relevant matters, Normative Ruling No. 1,397/13 sets out the creation of the Fiscal Accounting Bookkeeping ("ECF"), which must be filed annually as of calendar-year 2014, by the legal entities taxed under the actual profit regime, replacing the Transitory Fiscal Accounting Control – FCONT. It establishes that the ECF must be formed by the balance sheet and income statement accounts, considering the accounting standards and criteria in force on 12.31.2007.
Along these lines, Normative Ruling No 1,397/13 establishes among others that the legal entities taxed under the actual regime should observe the accounting methods and criteria in force on 12.31.2007 on the determination of the profits and dividends to be paid or credited with exemption to its beneficiaries.
In this respect, the income distributed which was not previously taxed at the level of the legal entity as a result of the RTT adjustments shall be subject to the following rules of taxation:
- In case of individual beneficiaries resident in Brazil: subject to the taxation by the Withholding Income Tax (WHT), based on the progressive tax rates, up to the cap of 27.5%, and shall be computed in their income tax basis reported in the Annual Income Tax Return;
- In case of legal entities domiciled in Brazil: the dividends shall be computed in the Corporate Income Tax and the Social Contribution on Net Profits tax basis;
- In case of beneficiaries domiciled abroad, but not in tax havens: shall be subject to a 15% WHT; and
- In case of beneficiaries domiciled in tax havens: shall be subject to a 25% WHT.
Again, it seems to us that Normative Ruling 1.397/2013 inadvertently innovates, without proper legal ground, when foresees a taxation on the distribution of the portion of profits that were not taxed because of the RTT adjustments.