Brazil Reviews Preferential Tax Regimes

by Mike Godfrey, Tax-News.com, Washington

01 July 2010

The Brazilian tax authority has introduced an appeals procedure in respect of its black and gray listing of preferential tax regimes, which are subject to special tax requirements.

Following requests from the Swiss, Dutch and Danish governments, Brazil has also agreed to suspend 'temporarily' its preferential tax regime status, while the situation is reviewed.

Switzerland was classified as a preferential tax regime by virtue of having income tax of lower than 20%. As a result, 25% withholding tax is charged on interest and dividend remittances and there is a 25% capital gains tax. Also transfer pricing supervision is much stricter, with 'subcaptalização' (thin capitalization) rules meaning that interest payments by Brazilian companies to related companies in Switzerland are not tax deductible in Brazil.

With regard to the Netherlands and Denmark, similar special tax treatment applied to holding companies that had no substantial economic activities of their own. While a review takes place, these companies will benefit from safe harbour provisions.

Other countries affected, including Iceland, Hungary, Luxembourg, Malta, Spain, the US (LLCs) and Uruguay, may also benefit from the appeals procedure, if they decide to request reviews. However at present it is unclear as to how long the reviews will take or whether any of the countries concerned will succeed in being removed from black/gray list status.

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