"Tax Routes, Smooth Travel" Tax Tips for Foreign Investment - Brazil (Part I)

China and Brazil, separated by more than 18,000 kilometers, are the largest developing countries and important emerging market countries in the eastern and western hemispheres, respectively. Brazil is the first developing country to establish a strategic partnership with China, and it is also the first Latin American country to establish a comprehensive strategic partnership with China. China and Brazil, the economies of the two countries have strong complementarity and great potential for cooperation. The "Tax Road, Lu Tax Travel" Foreign Investment Tax Tips - Brazil Chapter (Part I) will take you to understand Brazil's tax system and corporate income tax.

1. Overview of the Brazilian tax system

　　The types of taxes in Brazil are complex, and can be divided into federal, state and municipal taxes according to the level of administrative jurisdiction. Among them, federal taxes include income tax, import tax, export tax, financial operation tax, temporary financial circulation tax, rural land tax, etc., state government taxes include goods circulation service tax, vehicle tax, inheritance and gift tax, etc., and municipal government taxes include social service tax, urban real estate tax, real estate transfer tax, etc. In addition, enterprises are also required to pay various social expenses, including social insurance premiums, seniority security funds, social integration plan fees, social security fees, etc.

　　The Brazilian government adopts a hierarchical collection and management of taxes, and the specific types of taxes that should be paid by enterprises and individuals need to be detailed and consulted by the tax department.

2. Enterprise income tax

　　Corporate taxpayers are required to pay corporate income tax (IRPJ) and net profit social sponsorship fee (CSLL) on income and capital, both of which are used together as corporate income tax. Although the net profit social sponsorship fee is essentially a social security expense, its tax basis and collection rules are almost the same as those of the enterprise income tax, that is, generally speaking, all income subject to enterprise income tax is also subject to the net profit social sponsorship fee. Therefore, in practice, the net profit social sponsorship fee should be regarded as a kind of enterprise income tax.

(1) Taxpayers

　　Corporate income tax payers include:

　　1. All resident legal entities;

　　2. Branches, agents and representative offices of non-resident entities;

　　3. Non-registered commercial institutions;

　　4. Acquisition of a non-resident entity derived from Brazilian origin.

　　A legal entity registered in Brazil is a resident taxpayer of corporate income tax. Although a consortium of entities with separate legal personality is directly involved in the transaction in their name, the liability for corporate income tax is borne directly by the entities registered with the Federal Tax Service according to their own participation ratio. Non-profit entities are exempt from corporate income tax if certain conditions are met, but these entities are still subject to their subsidiary obligations.

　　Brazilian law does not recognize the concept of a hybrid entity, i.e. an organization that has a separate legal personality but is not considered a taxable entity, such as a transparent partnership.

　　Individually-owned businesses are regarded as corporate taxpayers and must bear corporate income tax obligations if the following conditions are met:

　　1. Conduct business in the name of an individual company and register as an industrial and commercial enterprise with the Ministry of Trade;

　　2. The person constitutes a commercial establishment by habitual conduct of civil or commercial activities, even if it is not registered with the Ministry of Trade;

　　3. Economic activity engaged in apartment or land planning consulting.

　　In other cases, the income obtained by individual industrial and commercial households shall be subject to individual income tax.

(2) Taxable income

　　The Brazilian National Tax Code provides for taxable income as follows:

　　1. Income derived from capital, labor, or a combination of both;

　　2. Any kind of income, i.e. any increase in wealth.

　　As income is broadly defined, corporate income tax applies to all income derived from capital, services or a combination of the two, as well as gains on the disposal of a taxpayer's assets or interests. Therefore, corporate income tax applies to all income derived in the course of industrial and commercial transactions (including income from services), financial income from various sources (including income from investment portfolios and disposal of property or interests).

　　Resident businesses are taxed on worldwide income. According to the regulations, any Brazilian resident enterprise is required to include in the corporate income tax base not only income derived from foreign sources (whether directly or through a permanent establishment), but also the annual profits of its overseas shareholding companies according to the proportion of its shares, regardless of whether the participating companies have actually distributed the profits.

(3) Verification methods

　　There are four main verification methods for enterprise income tax collection: actual profit method, verified profit method, simplified tax calculation method and compulsory profit verification method.

　　1. Effective profit method

　　Taxpayers pay enterprise income tax on the basis of actual profits, which are adjusted accounting profits, i.e., accounting profits are increased or decreased in accordance with relevant tax laws and regulations. According to the provisions of the Federal Constitution, all kinds of income are used as the basis for corporate income tax, so unless otherwise specified, any increase in assets is taxable income.

　　The following taxpayers are obliged to apply the real profit method:

　　A. Gross income of more than R$78 million in the previous tax year;

　　B. financial institutions, insurance companies, securities brokers, and other similar entities;

　　C. Entities with foreign source profits, gains and capital gains (excluding exports of goods or services);

　　D. Tax-advantaged entities;

　　E. entities engaged in factoring business;

　　F. Entities engaged in real estate securitization, finance, and agricultural credit.

　　2. Approved profit method

　　According to the regulations, taxpayers whose gross income (including capital gains) does not exceed R$78 million in the previous year or whose average monthly income in the previous year does not exceed R$6.5 million, as well as other entities that are not subject to tax under the actual profit method, can be taxed under the verified profit method. The Verified Profit Method is a simplified method of calculating corporate income tax, according to which the taxpayer calculates the amount of income tax according to the statutory proportion based on the gross income.

　　The Corporate Income Tax (IRPJ) and the Net Profit Social Sponsorship Fee (CSLL) have different regulations on the approved ratio. For IRPJs, the approved percentage ranges from 1.6 per cent (sales of fuel and gas) to 32 per cent (provision of services), and commercial activities generally follow the approved rate of 8 per cent. For CSLL, the approved ratio ranges from 12 per cent to 32 per cent, with 12 per cent generally for commercial activities and 32 per cent for the provision of services. Enterprises engaged in different types of business activities shall be calculated according to different approved proportions.

　　3. Simplified tax calculation method

　　The simplified tax calculation method refers to the payment of taxes according to a certain percentage of the total income of the taxpayer, the proportion of which varies according to the economic activity that generates the income (the essence of the economic activity determines the levy or non-levy of certain taxes), and the relevant proportion according to the order of magnitude of the income is used in a progressive system. This approach applies only to micro and small enterprises.

　　Enterprises whose cumulative annual income does not exceed the following limits can use the simplified tax calculation method for tax calculation:

　　A. Micro enterprises do not have a cumulative annual income of R$3.6 million;

　　B. The cumulative annual income of the small business does not exceed R$4.8 million.

　　The simplified tax system only requires a one-time monthly payment of corporate income tax, net profit social sponsorship fee, industrial product tax, social security fee, social integration tax, commodity circulation service tax, service tax and social security paid by enterprises for employees.

　　4. Mandatory Profit Verification Method

　　The tax rate is 15% under the compulsory assessment of profits. When the taxpayer's monthly taxable income exceeds R$20,000 (or annual taxable income exceeds R$240,000), an additional 10% income tax is levied. In addition, the net profit social sponsorship fee is levied at a rate of 9%.

　　The compulsory assessment of profits method is not a tax payment method that taxpayers can choose on their own initiative, but a compulsory taxation method adopted by the tax authorities when taxpayers fail to fulfill their obligations to pay enterprise income tax and its ancillary obligations.

(4) Tax rate

　　Corporate Income Tax Rate:

　　1. Corporate income tax: 15%;

　　2. Corporate income tax surcharge: 10% (for the part of annual taxable profits exceeding R$240,000);

　　3. Net profit social sponsorship fee: 9%.

　　For more information on other types of taxation in Brazil, please stay tuned for the next issue of the Outbound Investment Tax Tip - Brazil Part II (Part II).