On 4 December 2013 it has been published that the Provisional Measure 627/2013 (PM 627/2013), introduced important changes to the Brazilian tax legislation. This was published in the Official Gazette of 12 November 2013.
Among those changes, PM 627/2013 introduced CFC rules for resident individuals holding a participation in foreign entities.
According to the new CFC rules, foreign profits derived by resident individuals are considered available on the date of the foreign entity’s balance sheet, regardless of actual distribution, and are subject to individual income tax in Brazil in proportion to the individual’s participation, under the following conditions:
• The foreign entity is a foreign controlled company and is:
- Located in a low-tax jurisdiction as defined by the transfer pricing legislation;
- Subject to privileged tax regime as defined by the transfer pricing legislation; and
- Subject to “under-taxation” (i.e. subject to a foreign tax regime taxing at a nominal rate below 20%).
• The resident individual does not hold all constitutive documents of the foreign entity, duly registered at a public notary, where all shareholders are identified.
The new CFC rules also apply to resident individuals who, together with other related individuals or legal entities, hold more than 50% of the voting capital of the foreign entity.
The new CFC rules are effective as of 1 January 2015.
