Have you ever heard of “tax havens”? In Brazil, tax legislation doesn’t explicitly use this term, but rather classifies certain jurisdictions and regimes in a specific way. Understanding this classification is fundamental for the application of certain tax rules, especially in international operations and the taxation of foreign profits.
The Brazilian Federal Revenue (Receita Federal) refers to these jurisdictions as a country or dependency with favorable taxation or a privileged tax regime. Let’s understand each one:
Country or Dependency with Favorable Taxation
A country or dependency is considered to have favorable taxation if it meets one of the following conditions:
- It either does not tax income or taxes it at a maximum rate below 17%.
- Its domestic legislation does not allow access to information about corporate structure, ownership, or identification of the ultimate beneficiary of income attributed to non-residents.
Privileged Tax Regime
A tax regime is considered privileged even if the country is not listed as having favorable taxation, but it presents one or more specific fiscally advantageous characteristics. Instruction Norm RFB No. 1037 from 2010 lists some examples:
- Regimes applicable to certain financial companies in Uruguay (until 2010).
- Regimes for holding companies in Denmark that do not perform substantial economic activities. For holdings, “substantial economic activity” is defined as having qualified employees and adequate physical facilities for management.
- The Free Zone Regime in Costa Rica.
- The Madeira International Business Center in Portugal.
Countries and Dependencies with Favorable Taxation
The Brazilian Federal Revenue regularly publishes a list of these jurisdictions, and it’s important to note that this list may change. In its current version, the list includes, among others, the following locations:
- Andorra
- Anguilla
- Antigua and Barbuda
- Aruba
- Ascension Islands
- Commonwealth of the Bahamas
- Bahrain
- Barbados
- Belize
- Bermuda Islands
- Brunei
- Campione D’Italia
- Channel Islands (Alderney, Guernsey, Jersey, and Sark)
- Cayman Islands
- Cyprus
- Cook Islands
- Djibouti
- Dominica
- Gibraltar
- Grenada
- Hong Kong
- Kiribati
- Labuan
- Lebanon
- Liberia
- Liechtenstein
- Macau
- Maldives
- Isle of Man
- Marshall Islands
- Mauritius
- Monaco
- Montserrat
- Nauru
- Niue
- Norfolk Island
- Panama
- Pitcairn Island
- French Polynesia
- Qeshm Island
- American Samoa
- Western Samoa
- Saint Helena Islands
- Saint Lucia
- Federation of Saint Kitts and Nevis
- Saint Pierre and Miquelon
- Saint Vincent and the Grenadines
- Seychelles
- Solomon Islands
- Swaziland
- Sultanate of Oman
- Tonga
- Tristan da Cunha
- Turks and Caicos Islands
- Vanuatu
- U.S. Virgin Islands
- British Virgin Islands
- Curaçao
- Sint Maarten
- Ireland
Why Does This Classification Matter?
Classifying a jurisdiction or regime as “favorable” has direct implications on how income and profits are taxed in Brazil.
For example, for individuals residing in Brazil who own controlled entities abroad, the general rule is that profits are taxed when effectively distributed. However, if the controlled entity is located in a country or dependency with favorable taxation or benefits from a privileged tax regime, the profits earned from January 1, 2024, are subject to annual taxation at 15% in the individual’s Annual Tax Return, regardless of whether or not they have been distributed.
Furthermore, this classification also influences transfer pricing rules and other tax norms applicable to transactions with parties resident or domiciled in these jurisdictions or beneficiaries of these regimes.
Understanding the concepts of favorable taxation and privileged tax regimes is crucial for tax compliance. The list and rules are defined by the Brazilian Federal Revenue, and it is always advisable to seek professional guidance to ensure proper compliance with tax obligations.