ROYALTY PAYMENT

Cross border payment of royalties is taxed by:

- WHT: ordinary rate is 15%, but if the beneficiary is established in a low tax jurisdiction the rate is increased to 25%.
- CIDE: Special contribution of 10% on the royalty amount.
- IOF: 0.38% on the amount remitted.

Journal entries are:

Assumptions:
Royalty Amount: BRL 100.000

D - Royalty (P/L) - BRL 100.000
C - Royalty Payable - BRL 85.000
C - WHT Payable - BRL 15.000

D - CIDE Cost (P/L) - BRL 10.000
D - IOF Cost (P/L) - BRL 323

C - CIDE Payable - BRL 10.000
C - IOF Payable - BRL323


Double Tax Treaties may grant some benefits in terms of reduction of WHT. For instance, in case of Japan, the rate may be reduced to 12,5%.

Corporate Tax Deduction.
Under the Corporate Tax Code, the royalty is deductible if meet the maximum rate allowed for remittance. INPI (Intellectual Property Agency) is reponsible to determine the applicable rate for royalties. Usually, Brazilian companies present the royalty agreement to INPI and, after approved, they receive a formal act, stating the applicable rate for royalties. Usually, the rate varies from 1% to 5%.

Royalties duly registered at INPI is not subject to Brazilian transfer pricing rules.