In June, the Brazilian Federal Revenue Service (SRF) issued the Ruling (Instrução Normativa - IN) 1,037, which was then altered by the IN 1,045. These Rulings updated the list of Tax Havens, as well as specified the situations covered by the Privileged Tax Regimes provisions.

The IN 1,037/10 revoked the IN 188/02 and added the following jurisdictions as Tax Havens: Switzerland, Ascension Island, Brunei, Kiribati, Norfolk Island, Pitcairn Island, French Polynesia, Queshm Island, Islands of St. Helen, Solomon Islands, Saint-Pierre and Miquelon Island, St. Kitts and Nevis, Swaziland and Tristan da Cunha.

Under this new legislation, the following legal entities fall under the Privileged Tax Regime concept:

• Holding Companies in Luxembourg;
• Holding Companies in Denmark and in The Netherlands if they do not carry-out “substantial economic activities” (the concept of substantial economic activities has not yet been clarified);
• “Sociedad Anonima Financiera de Inversion (Safis)”, in Uruguay, until December 31 of 2010;
• International Trading Companies (ITCs) in Iceland;
• Offshore KFTs in Hungary;
• State Limited Liability Companies (LLCs) in the United States of America, that are owned by non- residents and are not subject to federal income tax in the U.S.;
• “Entidad de Tenancia de Valores Extranjeros” (E.T.V.Es.) in Spain;
• International Trading Company (ITC) and International Holding Company (IHC) in Malta.

Luxembourg (with regard to holding companies set up in accordance with the 1929 Law) and Malta are not listed as Tax Havens anymore. However, the legislation provides that certain situations involving these countries are now considered to fall under Privileged Tax Regimes concept.

The inclusion in the list of Tax Havens and under the Privileged Tax Regimes may be challenged by the jurisdictions. The Swiss and the Dutch governments have already filed their claims. They succeeded and, as a consequence, the inclusions of Dutch Holding Companies under the Privileged Tax Regimes and of the Switzerland in the list of Tax Havens were suspended temporarily.

This legislation impacts several rules applying to international transactions involving Brazilian Companies, such as the transfer pricing and thin capitalization rules and the taxation on foreign remittances.

We are available to discuss issues that may arise from the said changes in the Brazilian Tax legislation.
(provided by Marcelo Oliveira, the Head of Taxes of Canarim Auditores, Rio de Janeiro, Brazil)