The general rule is that cross-border payments of interest are subject to withholding tax at a rate of 15% pursuant to Law 9,481/97.
Under the pre-export financing arrangement system, an exception to the imposition of withholding tax is provided for certain cross-border payments of interest. In instances of export financing, the amount of revenues anticipated from the exports of goods and services—as well as the tax liability associated with such export transaction revenues—can be anticipated for purposes of determining interest payments that are exempt from withholding tax in Brazil.
March 2012 restriction on use of pre-export financing regime
In March 2012, changes to the pre-export financing regime significantly reduced the use of such pre-export financing arrangements.
Circular 3,580 (1 March 2012), issued by the Brazilian Central Bank, imposed two new restrictions on the pre-export financing arrangement regime:
- The shipment of goods or the rendering of services had to be made within 360 days from the date of receipt of the financing (i.e., anticipated export revenues). Before Circular 3,580 there was no such time limitation.
- Pre-export financing had to be contracted between importer and exporter only (i.e., the foreign importer had to be the one anticipating delivery of the funds to the Brazilian exporter and also the one receiving the goods).
Relief from March 2012 restrictions
The Brazilian Central Bank took a step back, and removed the second restriction with the issuance of Circular 3,604 (28 June 2012).
Therefore, the 360-day time limitation for shipping the goods remains in place; however, as of 28 June 2012, the involvement of a third party in pre-export financing arrangements is allowed.
Thus, funds can be anticipated in exports financed by a third company (e.g., a financial institution, instead of the foreign importer) by the Brazilian exporter, thereby preserving the withholding tax exemption.
Read a July 2012 report [PDF 49 KB] prepared by the KPMG member firm in Brazil:
Changes on Pre-Export Financing (Exportação Financiada) Mechanism