Brazilian resident companies are taxed on worldwide income. Both foreign branches’ and subsidiaries’ profits are taxed as earned. Double taxation is avoided by means of foreign tax credits.
Brazil has also signed various treaties for the avoidance of double taxation. Fees and other related expenses paid in Brazil for services rendered abroad are subject to withholding taxes of 15% or lower according to the treaty rate.
This is based on overseas remittances and varies from 15% to 25% depending on type of income.
The CIDE is a levy on payment of royalties and services when there is a transfer of technology, or when the services provided are considered to be technical assistance. The rate is 10%.
The IOF applies to various types of transactions, including loans, insurance policies and short-term money market applications. In general, IOF is levied at a rate of 0.38% on foreign exchange (the acquisition or sale of foreign currency). Therefore, loan transactions are subject to IOF at a rate of 6%, if a minimum maturity period is not observed. Certain exceptions and specific IOF rates also apply.
No restrictions are imposed to distribute dividends to the shareholders, although corporations are required to allocate 5% of their annual income as legal reserve. Dividends paid out are not subject to withholding tax.
No restrictions are applied to the payment of interest if the loan contract is under market conditions and formally registered at the Central Bank. Interest expenses are, under Brazilian tax rules, to be income tax deductible.
Those which involve know-how are subject to registration with approval from the Brazilian Industrial Property Agency, and to 15% withholding tax and 10% CIDE (Contribution of Economic Domain). Expenses have limited income tax deduction.
General payments for foreign services are subject to 25% withholding tax, 1.65% PIS, 7.6% COFINS, and ISS according to the city in which the company is located.
Foreign airlines and shipping companies are exempt from Brazilian income tax on their operations within Brazil provided equivalent exemption is available to similar Brazilian companies in the countries concerned.