RFB publishes Interpretative Act on the Origin of Investments made by 4,373 Non-Resident Investors for purposes of applying Special Tax Regime
On December 20, 2019, the Brazilian Federal Revenue (“RFB”) published Interpretive Declaratory Act (“ADI”) No. 05, of December 17, 2019 (“ADI RFB No. 05/2019”), which deals with the interpretation to be adopted by Tax Authorities regarding the application of the “Special Tax Regime”[1] applicable to income earned by individual or collective non-resident investors (“NRI”) in connection with financial transactions performed in Brazil in compliance with the rules and conditions established by the National Monetary Council (“CMN”) – currently, CMN Resolution No. 4,373, of September 29, 2014 – and which are not resident or domiciled in a tax favorable jurisdiction (“TFJ”), as defined by article 24 of Law No. 9,430, of December 27, 1996 – i.e., the Special Tax Regime applicable to “Non-TFJ NRI”.
According to ADI RFB No. 05/2019, except in cases involving willful misconduct, fraud or simulation, the effective origin of an investment, for the purposes of applying the Special Taxation Regime, shall be irrelevant, in such way that the Special Tax Regime shall apply based on the jurisdiction of residence of the direct investor investing in Brazil (i.e., the NON-TFJ NRI, specifically the one registered with the Central Bank of Brazil – “BACEN”, in the portfolio investment category).
This interpretation adopted by the RFB is an attempt to clarify an issue which has long been discussed in the financial market and which has given rise to a number of tax inspection procedures, “compliance meetings” with the “Tax Representatives” of NRI and even the issuance of tax assessment notices, in which Tax Authorities have questioned the application of the Special Tax Regime to investment structures whose corporate structure/investment chain abroad included investors or intermediaries (e.g., “fundraising vehicles”) resident/domiciled either in TFJs or in Brazil. Indeed, article 100, paragraph 1 of IN RFB No. 1,585/2015 clarifies that, for purposes of defining the tax rate applicable to the income to be paid to the NRI, Tax Representatives are required to inform the “paying source” of the relevant income about the country/jurisdiction from which the investment is “originated”.
In this context, tax inspection proceedings performed by the RFB were generating doubts and uncertainty for Non-TFJ NRI Tax Representatives and for Non-TFJ NRIs themselves with regard to the tax regime applicable to their investments, particularly as to whether they should consider only the direct Non-TFJ NRI itself, and/or the “Final Beneficiaries”[2] of the investment structure (i.e., source/origin of investment), and even as to whether informing/identifying the Final Beneficiary of the corresponding Non-TFJ NRI could be deemed as a condition/requirement for the Non-TFJ NRI to be subject to the Special Tax Regime.
In our view, this new interpretation presented by the RFB by means of ADI RFB No. 05/2019 is, in principle, and if properly applied, more in line with the tax principles and rules which regulate these matters, as the rules set forth in IN RFB No. 1,863/2018, which require NRIs to provide information and documents (as applicable) related to their Final Beneficiaries, have not changed or created any tax rules, or changed the taxpayers to which the Special Tax Regime is intended to apply (i.e., Non-TFJ NRIs), but simply imposed an ancillary obligation (i.e., the provision of information or documents, as applicable).
Thus, ADI RFB No. 05/2019 clarifies that, for purposes of applying the Special Tax Regime, where there is no willful misconduct, fraud or simulation, the jurisdiction of origin of the investment should be considered as that of the direct NRI making said investment (i.e., the Non-TFJ NRI registered with the BACEN, in the portfolio investment category), regardless of the jurisdiction of residence of the NRI’s Final Beneficiary.
Notwithstanding the above, the RFB has still not clarified its understanding regarding what shall be considered as willful misconduct, fraud or simulation in these cases, which shall in turn directly impact the RFB’s understanding on whether the Special Tax Regime shall apply to certain investment structures, especially where, e.g.:
• there are “fundraising vehicles” located in TFJs abroad, which is absolutely typical/usual for this type of investment structure in the financial and capital markets; or
• the direct NRI’s corporate structure/investment chain of investments occasionally has, on a non-intentional and residual basis, some investors located in TFJs or even om Brazil.
Our expectation is that ADI No. 05/2019 will be properly applied by the Tax Authorities and used as a basis for disregarding, for taxation purposes, only those investment structures which are intentionally abusive, fraudulent and simulated, and for preserving those investment structures which, albeit having TFJ-located entities along their corporate structure/investment chain, constitute legitimate and usual/typical financial investment structures, entitled to being subject to the Special Tax Regime.
Notwithstanding the above, particularly with respect to investments made by Non-TFJ NRIs in Equity Investment Funds (“FIPs”), which are subject to a zero income tax rate benefit (“Income Tax Zero Rate”)[3], in our view, ADI RFB No. 05/2019 does not amend or in any way change the provisions of item I, paragraph 1 of article 3 of Law No. 11,312/2006 regarding the necessary compliance with the so-called “40% Limit Requirement” by Non-TFJ NRIs investing in FIPs for the purposes of applying the Income Tax Zero Rate, in such way that the analysis of the corporate structure/investment chain of Non-TFJ NRIs corresponding to legal entities or investment funds is still required to be made in order to verify whether the relevant Non-TFJ NRI shall be subject to the Income Tax Zero Rate.
[1] Provided for in articles 88 to 98 of RFB Normative Instruction (“IN”) No. 1,585, of August 31, 2015 (“IN RFB No. 1,585/2015”).
[2] As defined by article 8, paragraph 1, of IN RFB No. 1,863, of December 27, 2018 (“IN RFB No. 1,863/2018”).
[3] As per article 3 of Law No. 11,312, of June 27, 2006 (“Law No. 11,312/2006”).
