Tax on Foreign Investments in Brazil
In order to maintain the Brazilian economic growth, the national government adopts a welcoming policy towards foreign investments. In this article, we outlined the main procedures and rules regarding foreign investments in the country.
The Brazilian receptiveness to foreign capital
Currently, Brazil lives a very favorable economic environment for receiving foreign investment. This period is strongly influenced by macro and micro factors, namely: economic stability, low index inflation, recent elevation of the level of investment in the country, recommendation from international agencies specialized in global risk assessment for investments, high domestic interest rates, favorable exchange rate, facilities for import of inputs, abundant and cheap labor, among others.
In 2011, Brazil was the fourth country that received more investments, totaling USD 65.5 billion. In July 2012, the direct foreign investments broke a record: USD 8.412 billion, the greatest number since 1995.
The Brazilian development in several areas actually needs foreign investments in order to continue to grow. Brazil increasingly becomes a country receptive to foreign capital, as the government seeks solutions to turn this kind of investment more safe, by monitoring the remittances and creating mechanisms to avoid speculation schemes and capital flights.
Definition and types of foreign investments
According to Law 4.131, article 1: “Foreign capital is considered to be any goods, machinery and equipment that enter Brazil with no initial disbursement of foreign exchange, and are intended for the production of goods and services, as well as any funds brought into the country to be used in economic activities in the country, that belong to individuals or companies resident or headquartered abroad”. The article 2 states that “To the foreign capital will be dispensed to the same legal treatment given to national capital on equal terms, being forbidden any discrimination”.
Foreigners can invest in Brazil out of two forms of investments: direct investment or indirect/portfolio investments. When the investor owns 10% or more of the shares or voting rights in the Brazilian company he is going to invest, it is considered direct investment. When this participation is below 10% it is considered as an indirect investment.
The direct investments, known by the acronym IED, in turn, are divided in two types: equity capital and intercompany loans. Equity capital comprises the inflow of funds for goods, currency conversions in foreign direct investment, including the amounts allocated to privatization programs, related to the purchase/subscription/capital increase, all or part of the share capital of companies established in the country.
As for intercompany loans, it comprises the loans granted by headquarters based abroad to its subsidiaries, branches or affiliates established in the Brazil. The IEDs constitute the investments applied in startups or acquisitions of stakes from domestic companies.
Taxes on foreign investments
The foreign capital that enters the country as direct investment (IED), does not suffer any taxation. However, the intercompany loans will be subject to IOF at a rate of 6%. Even though intercompany loans are classified as IED, The Receita Federal considers this kind of investment as normal financial operations, interest-bearing, that should be subjected to the same IOF rates as national investors. Before, intercompany loans coming from abroad were subject to a privileged IOF rate of 0.38%.
The remittance of profits and dividends and the repatriation of the foreign capital abroad are exempted from the Withholding Income Tax when leaving Brazil. But that only applies if the sum of the capital to be send abroad is the same as the sum that was registered in the Brazilian Central Bank.
If the amount of capital is superior to the registered value, it is considered capital gain for the benefit of the foreign investor. Then it will be subject to the charges of Withholding Income Tax at a rate of 15%.
To avoid the Double Taxation in the capital flow among countries Brazil has signed Double Taxation Treaties with 28 countries, but still lacks DDTs with important partners, such as United States and United Kingdom.
Foreign Investors’ obligations and restrictions on foreign capital
In order to invest in Brazil, foreigners are required to:
- Appoint a legal representative in Brazil
- Select a custodian agent (entity authorized to provide such services by Bacen or CVM)
- Require an enrollment with CVM (Brazilian Securities and Exchange Commission)
- Select a Brazilian bank authorized to operate in the capital market for foreign currency exchange
The Brazilian legislation imposes some restrictions and hindrances for a number of activities that can only be explored by born or naturalized Brazilians and even have the participation of foreign capital forbidden. Those activities include:
- Health care companies
- Navigation and shipping companies
- Journalistic and radio broadcasting companies
- Sounds and images companies
- Service cable TV
- Mining and hydro power companies
- Road cargo transportation companies
- National airlines
- Companies located along the border areas
- Company of colonization and rural settlements
- Postal and telegraph services
Those prohibitions and restrictions are related to politics of national security to prevent:
- The acquisition of land in areas of the frontier zone by foreigners
- The acquisition of domestic companies by foreigners
- The exploration of crucial infrastructure activities by foreigners
Registration of foreign capital
The registration of foreign capital is be made through the RDE-IED (Registro Declaratório Eletrônico – Investimento Externo Direto - Eletronic Declaration Register), which is part of the Central Bank Information System (Sistema de Informações do Banco Central – SISBACEN).
This registration allows the foreign investors to remit profits, dividends and the capital initially invested abroad through the same exchange market used to bring the capital to Brazil. If the parties do not register the investment, the investments will be treated as domestic investments. Furthermore, the foreign investor and the receptor of the capital in Brazil may be subject to heavy fines for not having registered the investment with Bacen within the prescribed period.
The foreign investments must be done according to the laws of the country that is receiving the investments. All foreign investments must be registered with the Central Bank of Brazil. This registration is essential for offshore remittances, capital repatriation and registration of profit reinvestment.
In the case of direct investments, the responsible for the capital registration is the company or the representative of a foreign company in Brazil that is receiving the foreign capital.
For a foreign company to send the capital to Brazil, it has to send the money destined to investments from abroad, through a banking institution authorized by the BACEN to operate with foreign exchange. The remittance is not subject to previous authorization of the Central Bank of Brazil, but, either way, the transaction must be registered in this institution.
The register is done based on a declaration made by the responsible people, through the Electronic Declaratory Registration system from Sisbacen (Information System of the Brazilian Central Bank). The declaration has to be done in up to 30 days counting from the date the capital was sent.
The Brazilian Central Bank will issue a certificate of register with the invested amount in foreign currency and its corresponding value in the national currency. This certificate is necessary and essential to the remittance of profits abroad, the repatriation of the invested capital and registration of reinvestment of the profits earned in Brazil.