Joaquim Manhães Moreira,
Ricardo Ciconelo,
Daniel Takaki and
Lucas Kurtz *

Introduction

Developments in Brazil's mining and oil industry, preparations for international sporting events and increased consumer demand have prompted the Brazilian government to enact new tax measures.

Designed to promote foreign investment in technology, infrastructure and manufacturing, the new measures provide several tax incentives to multinational companies. Companies with sales, operations or investments in Brazil may benefit from the new regulations and should conduct a thorough analysis to determine how they can take full advantage of these new opportunities.

The following are among the most signficant tax measures enacted in 2011.

Plano Brasil Maior

Approved in August 2011, the Plano Brasil Maior comprises several measures designed to maintain the country's economic growth and promote industrial development. Examples of such measures include:

• a corporate income tax exemption for companies that manufacture high-technology equipment in north and northeast Brazil (under the Digital Inclusion Programme);
• a corporate income tax deduction for research and development expenses conducted by private scientific organisations;
• a reduction in excise tax for certain types of vehicle;
• a payroll tax deduction for textiles, footwear, furniture and software manufacturers; and
• a public procurement policy that creates new advantages for products manufactured in Brazil.

Digital Inclusion Programme

In recent years Brazil has provided tax breaks for certain domestically manufactured technology products. However, in the past, the petition process for these tax breaks has been lengthy and cumbersome. The Digital Inclusion Programme aims to shorten the time required to process and grant these petitions and to make it easier for technology companies to determine the benefit of producing their products in Brazil.

The programme also provides a sales tax exemption for domestically produced touch-screen tablet computers. To be eligible, the tablets must have no remote command function (NCM 8471.41) and must meet various manufacturing requirements.

As Brazilian sales tax under normal conditions is equivalent to a nominal rate of 9.25%, the tax savings provided here can be significant. Multinational technology companies producing such products are advised to re-evaluate whether opening a manufacturing plant in Brazil is worthwhile.

Tax liability of joint ventures

In the past, consortia and joint ventures were not considered legal entities and thus were not taxpayers. Under the old rule, companies that formed a joint venture could use the joint venture agreement to dictate each member's federal tax liability. This provided the opportunity for members of the joint venture to be taxed disproportionately to the capital that the member had invested in the project.

Law 12,402/2011 solidifies a previously passed provisional measure and attempts to prevent joint ventures from being able to dictate each member's federal tax liability. Under the law:

• business transactions conducted by joint ventures on behalf of a consortium are subject to federal taxes;
• revenue and profits of joint ventures are subject to federal income withholding tax; and
• joint venture entities are now responsible for preparing and filing necessary tax documents.

In order to avoid increased tax burdens and determine the most efficient tax structure, each joint venture project should be analysed under the law.

Income tax exemption for securities

Law 12,431/2011 provides an income tax exemption for income that has been derived from qualifying securities, bonds and notes. This exemption applies exclusively to:

• foreign beneficiaries that perform financial operations in Brazil in accordance with the National Monetary Council Resolution 2,689/2000; and
• investment funds or private equity entities that are comprised of bonds, where at least 98% of the investment fund or private equity firm is held by foreign investors.

To qualify, the financial instrument must:

• have been acquired after January 1 2011;
• have been issued publicly by a non-financial private entity; and
• apply to income paid or remitted abroad, except where such remittance is to a tax haven or privileged tax regime jurisdiction.

Taxation of debentures for infrastructure or research and development

Under Law 12,431/2011, income that is derived from debentures issued by companies incorporated for the special purpose of implementing infrastructure or research and development projects will be taxed at 0% for individuals residing in Brazil and 15% for corporate entities located in Brazil.

Infrastructure investment funds

In another effort to promote the development of infrastructure, Law 12,431/2011 amends the criteria for infrastructure investment funds where:

• at least 90% of the fund is composed of shares, subscriptions, convertible and non-convertible debentures or other securities issued by public or private corporations;
• the fund has a minimum of five investors;
• ownership of any single investor is not greater than 40%;
• the fund appoints members to each portfolio company's board of directors; and
• the fund-appointed board of directors participates in decisions made at the portfolio company board level.

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* Joaquim Manhães Moreira, Ricardo Ciconelo, Daniel Takaki and Lucas Kurtzare lawyers at Manhães Moreira Advogados Associados.