INVOICES

We continue using the example of São Paulo. We emphasize that in Brazil is necessary to obtain authorization for the issuance of invoices, in accordance with the activity and guidance of local

tax authorities.

The company that acts in the area of industry and/or commerce can issue, in accordance with the activity area, one of the following kinds of invoices:

FISCAL BOOKS

There are also some bureaucracy obligations for the company, such as to keep certain fiscal books. Taking as example the Municipal Area of São Paulo, we have the following fiscal books for a trading company (in its simplest format):

FOREIGN INVESTMENT

The registration of foreign capital must be made with Central Bank of Brazil within thirty days counted upon the day of its origin (entrance in the country, conversion, etc.) or ninety days after customs clearance, in case they are made up of tangible assets.

Central Bank of Brazil provides the list of required information and procedures for the foreign capital registration in Circular Letter 2.997.


Investments that are not registered or to which registration is denied, are called “contaminated capital” and it will not be possible to obtain registration as reinvestment (capitalization), remittal of profits attributed to the foreign investor or repatriation.

On the other hand, the Brazilian Central Bank admits the “decontamination” of capital by means of an authorized administrative procedure.

In practice, such process is very straightforward and it could be performed through the internet (it is expected about 1 hour to complete the registration).

TAX LOSS CARRYFORWARD

As already mentioned, starting on January 1, 1996, the offsetting of fiscal losses (IRPJ) and social contribution negative base on income are regulated, respectively, by article 15 and 16 of Law 9.065/95. In both compensations, the calculation base of taxes is limited to 30% of profit in the period after
additions and exclusions to taxable income.

The legal entity that monthly pays the income tax through an estimated calculation, as per a suspension balance sheet or trial balance or as per the annual balance sheet as of December 31, is entitled
to fully offset the fiscal losses and CSLL negative base of certain months of the calendar year with profit of other months of the same year.

There is no concept of tax loss carryback in Brazil, even in case of special operations such as liquidation, merger, among others.

CORPORATE INCOME TAXES

When opting for one method for assessment of tax on income, a Brazilian company should consider all advantages and advantages of each assessment method. For a better understanding of the systems and

respective rates in effect in Brazil, we present the following guide:

For companies subject to Corporate Income Tax (IRPJ), there are three methods for assessing
taxes on income: Taxable Income, Assumed Income and Arbitrated Profit.

As from the calendar year 1996, regardless of their type of business organization and nature of activity performed, legal entities started to pay IRPJ at a rate of 15% (fifteen per cent), applicable on the calculation base assessed either through the taxable income, assumed income or arbitrated method.
On the portion of taxable, assumed or arbitrated profit exceeding the value resulting from the multiplication of R$ 20,000.00 (twenty thousand Reais) by the number of months of the respective assessment period, there is an additional that should be taxed at a rate of 10% (ten percent).

CSLL follows the same system used for assessment and payment of IRPJ and on the amount assessed it should be applied a rate of 9%.

Presumed Profit Method:
It it’s the mandatory method for companies with total revenue over R$ 48 million during the calendar year previous to the assessment, as well as entities that take part of the Brazilian Financial System and that have profits, yielding or capital gains coming from abroad.

Annual Taxable Income System (monthly payment):
In this method of taxation, IRJP and CSLL are monthly calculated, based on revenue. Percentages should be applied on the calculation base (defined in law, as per the activity performed by the
company). This should be added of other non-operating revenue and on that sum it is applied the IRJP rate. An adjust balance sheet has to be prepared in December to compare what was paid during the calendar year with assumed profit and actual result of the company. From that comparison, if it is verified that the amount paid as per the assumed profit (as anticipation) exceeds what was assessed in the adjustment balance sheet, the company should request the refund of what was overpaid or offset the amount with taxes payable of the same type or of a different nature, by means of a request to the Brazilian
Revenue and Customs Secretariat.

INTEREST ON NET EQUITY

Brazilian legislation (Law 9,249/05) states in addition to dividends, Brazilian companies may also pay shareholders with “interest on net equity" (in portuguese, "Juros sobre Capital Próprio").

The Interest on net equity election should result in  a deductible interest amount based on the entity’s net equity calculated from a Brazilian perspective. The interest on net equity represents a tax-deductible item for corporate tax purposes (income tax and social contribution tax on profits currently charged at a combined rate of 34%).

Interest on net equity is calculated by applying the long-term interest rate (TJLP) on the Brazilian entity’s adjusted equity, considering all equity variations occurred during the year (increases and reductions). The interest on equity deduction is limited to the larger of 50% of the payer’s retained earnings and 50% of the payer’s current profits, with some adjustments.

Interest on net equity is subject to 15% Brazilian income withholding tax on the date it is paid or credit to the recipient. Remittances will be also subject to IOF at 0%. The WHT can be reduced if the DTT provisions applies (e.g. Japan - 12.5% WHT).

The interest on equity amount can either be paid by the Brazilian entity to its owners or the amount can be capitalized by the Brazilian entity without the need to make an actual payment (the 15% Brazilian income tax withholding applies in any event and there are discussions whether a “symbolic” IOF would be charged).

The calculation of the interest on net income can be done in monthly, trimester, semester or anual basis. Moreover, the taxpayers can eventually make the election for this procedure till the maximum period of the submitance of the Income Tax Return to the tax authorities (June, 30 of the subsequent year).

The interest on equity deduction can be claimed on an annual basis. 

Retroactive Application.  This is support for taxpayers taking a position that interest on equity can be claimed retroactively in situations where the taxpayer could have benefited from the the election but failed to claim the deduction on its timely filed Brazilian income tax return. 

The statute of limitations in Brazil runs for five years from the filing due date of the income tax return.

Brazilian CADE publishes new merger rules

Following the promulgation of Brazil’s new antitrust law, the Council for Economic Defence (CADE) has published new rules outlining its updated merger control procedures.


CADE this week released the new form merging parties need to file to obtain clearance in Brazil, along with rules on fast-track merger control procedures and the authority’s new internal regulation.


CADE opened a public consultation on the rules, asking lawyers and interested parties to provide comments.
Olavo Chinaglia, CADE’s interim head: “There are several aspects which are yet to be discussed, such as transactions in the stock exchange market or involving private equity funds. Our objective is to finalise the three documents prior to 29 May, when the new antitrust law comes into force.”


Discussion among lawyers in Brazil focused on the changes introduced with the new merger notification form, which contributes to defining how CADE will implement the change from a post-merger to a pre-merger notification system introduced by the new competition law, approved in October and amended by President Dilma Roussef in December.
Under the new rules, the parties must sign a binding document formalising their merger before filing their notification. The merging companies must refrain from concluding their deal and maintain completely separate activities, preserving the reversibility of the merger. But they can apply for temporary exceptions.
Informal discussions between the companies and the authority’s superintendent-general before the filing will be regulated.


José Del Chiaro Ferreira da Rosa, at Advocacia José Del Chiaro in São Paulo, says the rules also provide for a deal to be cleared if CADE fails to review the transaction within a legal term, a point disputed when the law was first passed.


But several lawyers say the rules also give the authority too much power and increase the burden for merging companies to obtain clearance.


José Inácio Gonzaga Franceschini, at Franceschini e Miranda - Advogados in São Paulo, says the authority’s top officials will have too much say over whether to open merger control proceedings.
“The superintendent-general, who has already been awarded excessive authority under the new law, has been granted many more functions and authority than those listed in the new act, including the authority to decide whether an investigation or procedure will be initiated, at his sole and absolute discretion, and based on no specific standards.”


Sérgio Varella Bruna, at Lobo & de Rizzo Advogados in São Paulo, says the new notification form is very complex and CADE requires too much information from merging parties, including information that is unlikely to help in a merger review.


“The new draft form requires the parties to inform the turnover in the previous fiscal year of all companies of their economic groups in relation to all products and services sold by them, without limitation to Brazil, nor to the relevant markets, or to vertically related markets,” he says. “This is certainly too much and it is unlikely that this load of information will bring anything useful for the review of the transactions by CADE.”
Ana Paula Martinez, at Levy & Salomão Advogados in São Paulo, says the new merger form imposes a “significant burden” on the merging parties.


“One example is the list of supporting documentation required, even for cases that do not involve horizontal overlap or vertical integration,” she says. “They require the parties to present all market studies available that are related to all the parties to the transaction. The draft merger form also requires information on the parties' turnover and relevant market in the last five years, rather than in the last year, or the last three years. The draft rules failed to exclude the vendor turnover of the turnover threshold, based on the effects theory. Interpreting the turnover threshold as applicable to the seller's entire corporate family is not consistent with international best practices and CADE could have included this in the new set of rules.”