In general, certain payments may be treated as a deemed repatriation of funds from Brazil—i.e., payments of dividends or payments of interest on net equity.
Concerning payments of interest on net equity, the expense related to such payments may be deductible for corporate income tax purposes as long as the limitations imposed under Brazil’s federal law 9,249/95 are observed.
Reason for guidance
The calculation of interest on net equity is based on the company’s net equity.
Previously, it was uncertain as to whether the interest on net equity would be calculated based on the company’s net equity under new Brazilian GAAP (BRGAAP) as aligned with IFRS, or under old BRGAAP.
The Brazilian accounting rules were aligned with IFRS in 2008 (i.e., new BRGAAP). Due to this change, companies could find that the amount of net equity calculated under new BRGAAP could be an amount higher (or lower) than the amount of net equity calculated under old BRGAAP.
Earlier in 2013, Brazil’s tax authorities issued a normative opinion, providing that dividends are calculated by considering the profits generated in accordance with old BRGAAP.
The recent guidance—Solução de Consulta 103/2013—issued by Brazil’s tax authorities also provides that the calculation of interest on net equity is determined under old BRGAAP.
Therefore, “net equity” used as reference for the calculation of the amount of interest on net equity must be defined under the accounting rules that were in effect as of 31 December 2007 (i.e., before the introduction of new BRGAAP).
Tax professionals in Brazil have observed that the recent guidance may be viewed by some as controversial.
In any event, companies need to evaluate their past and current policies regarding interest on net equity payments, and identify possible tax exposure and alternatives to allow them to consider and address potential adverse tax consequences.
Read an August 2013 report prepared by the KPMG member firm in Brazil: Tax News: New guidance from Brazilian Tax Authorities regarding Interest on Net Equity (INE) calculation