Brazilian Tax Law on Foreign Investments

Understand how Brazil taxes foreign investments and find out how much it will cost to invest money in a Brazilian company

Brazilian Tax Law on Foreign Investments Brazilian Tax Law on Foreign Investments

By Daniela Froener and Layon  Lopes*

If you ever thought about investing in a Brazilian company, you probably thought about the impact of the Brazilian taxes and other costs involved in the operation, so this article is for you.

Initially, it should be clarified that the foreign investment in this article are those investments made by non-resident investors in Brazil with the objective of permanent participation in the Brazilian company who received the investment.

In terms of procedure, the foreign capital  must be registered in the Central Bank of Brazil prior to entering Brazil. This registration has the purpose of identifying the parties involved in operation and the characteristics of the operation. The person who will be responsible to do the registration of the operation in the Central Bank of Brazil must be nominated, and must keep all the documents available to the Central Bank for a period of 5 years.

So the first cost will be with a specialized legal and accounting service, which will carry out and be responsible for the operation in the Central Bank of Brazil. Ok, and the taxes involved?

In Brazil, the foreign capita,l when destined for direct investment in Brazilian companies, must pay only the Imposto Sobre Operações Financeiras (IOF) currently with a rate of 0.38%.

It is also understood by Brazilian law as foreign capital, the profits earned by companies headquartered in Brazil and attributable to individuals or legal entities resident or domiciled abroad, who are reinvested in the Brazilian company that generated such profits.

If the foreign investor decides to use such profits to acquire more participation in Brazilian companies, such profits to be reinvested are also understood as foreign capital, in the same way as the initial investment, and should be registered in the Central Bank of Brazil.

Well, we saw that direct investment in Brazilian companies suffers taxation only by the IOF amounting to 0.38%, but let’s imagine that you have invested in a Brazilian company, the investment has yielded profits, and now you are interested that such profits return to you in your country of origin, what would be the Brazilian tax with this operation?

First, you must observe the existence (or not) of an international agreement between Brazil and the country where you will send the capital and/or in which you are a resident.

Remittance of profits: income tax is not levied on profits and dividends paid, credited, delivered, employed or remitted by the legal entity to its partners or shareholders domiciled abroad, even in countries with favored taxation.

Repatriation of capital: remittances abroad of an amount equivalent to foreign capital registered with the Central Bank of Brazil, in the name of the investor, under the title of repatriation to his country of origin, are not subject to income tax at source, if the amount is equal to that recorded. If the amount is higher than that recorded, the capital gain is subject to income tax at the rate of 15%.

Attention here! The Central Bank of Brazil analyzes the shareholder’s equity of the company involved. If the shareholders’ equity is negative, the Central Bank of Brazil may consider that there has been a dilution of the investment and deny the repatriation of the capital.

Interest on capital: the remittance of interest to foreign investors as capital remuneration will be subject to income tax at a rate of 15%, but if the beneficiary is resident or domiciled in a country that does not tax income or that does at a rate below 20%, the tax rate will be 25%.

The tax will be withheld on the date of payment or credit to the beneficiary being responsible, being responsible for the payment source in Brazil.

Investing in a Brazilian company has a low cost with taxation, as well as the receipt of profits from the investment. However, repatriation of capital or the receipt of interest on capital invested has a higher tax implication, especially if the investor is located in a country with favorable taxation.

For more information about investment taxation and other costs involved, please contact us.

* Layon Lopes is the CEO of Silva | Lopes and Daniela Froener is COO of the Silva | Lopes team.