Brazil: Ireland included in list of tax havens and Austrian holding companies in the privileged tax regime list

Brazilian tax authorities have issued Normative Instruction 1,658/2016, including Ireland in the list of tax havens and adding the regime applicable to Austrian holding companies to the list of privileged tax regimes. Moreover, the Normative Instruction explains the definition of ‘significant economic activities’ for the purposes of the Dutch and Danish holding regimes.

Background

On June 4, 2010, the Brazilian tax authorities (RFB) issued Normative Instruction (NI) 1,037/2010, updating the list of countries considered as tax havens (black list) and adding a list of regimes regarded as privileged tax regimes (grey list).
On September 14, 2016, the RFB published NI 1,658, including Ireland in the black list and adding the regime applicable to Austrian holding companies to the grey list. The grey list, which has been subject to several changes over the past few years, also considers Dutch and Danish holding regimes as privileged tax regimes, however, for those specific countries, only where the entities benefiting from the regimes do not carry out significant economic activities. The NI 1,658 is effective as of August 01, 2016.

Significant economic activities

In this regard, NI 1,658 in general terms confirms the RFB’s initial understanding on what should be viewed as ‘significant economic activities’ - previously shared by the RFB through a Public Consultation no 007/2016 released in May, 2016. According to NI 1,658, a foreign holding company is deemed to carry out significant economic activities if it has, in its country of domicile, operating capacity to manage and make decisions regarding (i) activities with the purpose of generating income from its assets or (ii) management of equity interests with the purpose of generating income in the form of profit distributions and capital gains.

Operating capacity would be measured by (i) the existence of physical facilities and (ii) qualified employees to manage and make decisions according to the complexity of the tasks to be performed. It is important to note that the concept of significant economic activities is applicable only to the Dutch and Danish holding regimes, and not to the Austrian holding regime. The latter is regarded as a privileged tax regime regardless of whether significant economic activities are carried out.

Further adjustments

Further, NI 1,658 has adjusted the black list by replacing the Dutch Antilles for Curaçao and Saint Martin, and deleting St. Kitts and Nevis, which was duplicated in the previous IN, keeping the country listed only under its native Portuguese name, São Cristóvão e Nevis.

The takeaway

These changes, together with the application of the Brazilian CFC, transfer pricing, thin capitalization, more strict deductibility rules, and higher WHT rates on payments to black-listed jurisdictions, among others, may have significant impacts on international structures involving Brazilian entities and the jurisdictions mentioned above (i.e. Austria, Ireland, the Netherlands and Denmark).

Multinationals are encouraged to analyze how these changes may affect their specific structures.