Interesting development about CFC rules and Brazil

[Outlander]

I have a client who's Brazilian and wants to setup a Cayman corporation for crypto-trading. Initially, I advised him against it because, as a resident of Brazil, he'd be subject to stringent CFC rules and a high taxation, something like 35%. Also the complexity of book-keeping is enormous, with tax payments due every month that are deductible in the annual tax fillings.

It turns out he contacted PwC in Brazil and they said CFC only applies to Brazilian companies with offshore subsidiaries. If you, as a resident individual, own an offshore corporation, then you do not fall under CFC, and you only pay taxes upon profit distribution. Which is, to say the least, a stunning development and a ridiculous loophole for a high tax country such as Brazil.

Most of the websites that explain CFC touch the subject on a superficial level, without going into the details of each country, which can differ considerably. And when they do mention a country, they focus on high tax EU states such as Germany. It's important to explore other possibilities and not believe everything that you read out there.

If anyone has a different opinion on the above I'd love to hear, but PwC is a massive company and I doubt they'd give misleading information.

 

[Artemis Eleutheria]

You need to read the Brazilian pertinent regulation to be sure ... that PWC claims so does not make it true. In any case, Brazil is not an easy place to do business in.

I would explore if a change of residency (to Paraguay) could be an option worth pursuing.

 

[Outlander]

You need to read the Brazilian pertinent regulation to be sure ... that PWC claims so does not make it true. In any case, Brazil is not an easy place to do business in.

I would explore if a change of residency (to Paraguay) could be an option worth pursuing.

Reading the Brazilian pertinent regulation is as tough as learning Chinese in Braille. Anyways, the client and I researched it extensively, though we are not experts in the subject.

That PwC Brazil claims so does not make true, but it makes it incredibly likely, as this is a basic topic which would be known to an international corporation used to deal with complex legal structures involving offshore companies. Anyways, we're already getting a second opinion from a lawyer in Sao Paulo.

Brasil is not an easy place to do business with - true, but the client doesn't want to do business in Brazil. He wants to operate entirely offshore. The hurdle was CFC rules, but if they can be circumvented, the client would pay only personal taxes on distributed profits, and he's used to the tax system there.

 

[Spinat]

That PwC Brazil claims so does not make true, but it makes it incredibly likely, as this is a basic topic which would be known to an international corporation used to deal with complex legal structures involving offshore companies. Anyways, we're already getting a second opinion from a lawyer in Sao Paulo.

It would not surprise me if that is true and they don't really do any reporting. Brazil like the Baltics are all in to please the OECD and the USA but in the real world they give a f**k.

 

[Outlander]

It would not surprise me if that is true and they don't really do any reporting. Brazil like the Baltics are all in to please the OECD and the USA but in the real world they give a f**k.

This is not about reporting, this is about taxes. And Brazil is a hungry beast when it comes to taxes (the official symbol of the Tax Revenue agency is a lion), so it makes no sense, other than plain disorganization/incompetence, that they would leave out individuals owning offshore entities when they implemented CFC rules.

 

[Artemis Eleutheria]

Anyways, we're already getting a second opinion from a lawyer in Sao Paulo.

Good decision very.

Brasil is not an easy place to do business with - true, but the client doesn't want to do business in Brazil. He wants to operate entirely offshore. The hurdle was CFC rules, but if they can be circumvented, the client would pay only personal taxes on distributed profits, and he's used to the tax system there.

If he wants to operate entirely offshore he has to do something about his residency.

 

[Outlander]

If he wants to operate entirely offshore he has to do something about his residency.

I think you got this one wrong, with all due respect. He isn't trying to evade Brazilian taxes and doesn't want to change his tax residence. He has an expert consultancy backing the claim that by owning an offshore company as an individual while living in Brazil, he's out of CFC and may keep his profits abroad and not pay any taxes, until the day he decides to distribute profits. He may invest/trade entirely offshore and avoid personal income taxes in Brazil for an indefinite amount of time.

 

[Artemis Eleutheria]

I see I was not sufficiently clear in my statement. You may be correct that he may technically avoid CFC ... but that does not imply that he is "operating entirely offshore", but if you are correct (which I would find somewhat surprising) he might be able to avoid taxation.

Working with a single line of defense is risky though, particularly in a place like Brazil.

CFC Rules For Brazilian Resident Individuals - Income Tax - Brazil

On November 12, 2013, Provisional Measure n. 627 ("MP 627/2013") was published, which, among other relevant changes in Brazilian Income Tax Legislation, changed the way investments abroad are taxed when held by Brazilian-resident individuals.

www.mondaq.com

 

[fshore]

No cfc rules doesn't mean that there is legally no local tax. Check other tax rules. From pwc :

A legal entity is considered resident in Brazil if it has been incorporated in Brazil, and its tax domicile is where its head office is located.

The specific term ‘permanent establishment’ is not included in the Brazilian legislation, rather there is a concept of ‘taxable presence’.

In general, a non-resident company may be treated as having a taxable presence if it operates in Brazil either through: (i) a fixed place of business or (ii) an agent who has the power to enter into contracts in Brazil in the name of or on behalf of the non-resident

 

[Outlander]

I understand what you guys say and that has always been my understanding as well. However, Brazil is complex, and when finding some old article on the Internet explaining how something works in Brazil, there are two problems:

1. It's hard to correctly interpret the rules
2. Chances are the rules have already changed, due to court decisions, normative instructions, decrees and superseding laws

After talking to PwC, my client reached out to Sevilha Lawyers - sevilha.com.br, which are specialized in offshore management for Brazilian customers, and they basically corroborated what PwC had already explained:

1. The tax rules for a CFC are different depending on whether the shareholder is a Brazilian tax resident individual or a Brazilian company
2. If the shareholder is an individual, profits derived from the offshore are taxable when the distribution takes place
3. The offshore must do annual balances but won't pay corporate income tax in Brazil

The above implies that an offshore company that doesn't distribute profits to its individual shareholders will be tax exempt in practice, both on a corporate and on a personal income level. That opens a lot of doors for schemes where one fabricates expenses which are reverted to the benefit of the shareholders. Just saying this is a can of worms.

 

[Artemis Eleutheria]

Interesting, yes Brazilian legal/taxation matters are very complex ... maybe only beaten by the US.

If you have this confirmed by two independent qualified sources I would say you are good to go ... until the law or interpretation of the same changes again.

 

[fshore]

Sometimes when asking questions some details can be lost. I would double check with those lawyers that the same is true when the company is managed and run from Brazil (and not from the offshore country).

 

[Outlander]

Sometimes when asking questions some details can be lost. I would double check with those lawyers that the same is true when the company is managed and run from Brazil (and not from the offshore country).

That was crystal clear in both conversations as the client is a Brazilian resident.

 

[Fajosst]

I am Brazilian, as far as I know PwC is really correct. I'm not an expert on this subject, but I looked for some relative information a few years ago.

As offshore is not located in Brazil, there is no tax "residence" on national territory, so it will not be necessary to collect taxes from the Brazilian tax authorities on their income and capital gains. The individual who opens an offshore company will have his income taxed in the following cases:

• when they withdraw resources from the company directly (withdrawal of funds);
• or indirectly (payment of personal expenses by the company).

There are some loophole and strange situations in Brazil. I am a digital nomad, for example, I informed the Brazilian IRS that I am no longer resident in Brazil and today I don't pay taxes (legally) anymore. I can stay in Brazil 6 months a year and don't pay taxes, I don't know if this is normal in other countries.

Anyway, if you need to, I can send you some links about it, in Portuguese you will find some texts that you can translate to English to understand.

 

[notyetnomad]

Hey @Outlander , yes. You are mostly correct.

CFC rules don't apply to Brazilian personal income tax (IRPF).

Brazilian companies don't file annual tax returns.

Brazilian companies are taxed monthly and have completely different rules. And the rules change every 2-3 years.

Theses are not general CFC rules. They are far more restrictive.

However, brazilian companies also don't pay taxes on their subsidiaries.

The subsidiaries that may be forced to file taxes in Brazil.

Personally owned Brazilian companies are also taxed in Brazil. But the taxation is weird.

Foreign companies in Brazil are taxed according with these two things:
1. Brazil uses a "cash flow" accounting paradigm.
2. Brazil has a "default" simplified monthly tax system for all income outside the rules. This is called "Carnê Leão", and it is a tax of 27.5% on all income.

Since there are no rules for foreign companies, they use the above rules.

That means that you are taxed when the money enters a personal account at 27.5, monthly.

If you have a foreign company, you'll have to file the carnê leão whenever you send money to one of your personal accounts or make a purchase for yourself.

In thesis, if you but yourself a sandwich, you would have to file the carnê leão.

However, if you never bring any money to Brasil, you'll never be taxed.

And you'll never have to file anything.

What you need to file yearly is the ownership of the shares of your foreign company and how much you have invested on it.

It is the same treatment as if you had Apple shares.

The goal of this filing is not to tax your company, but to tax capital gains on these shares.

TLDR: offshore companies are great for Brazilians if they don't want to spend their money on Brazil.