In December 2021, Brazil introduced sweeping changes to its legal framework on foreign exchange (under Law 14.286/2021).
In addition to various important changes regarding the use of the Brazilian currency in foreign markets, the new law brings a fresh approach for the remittance of IP royalties from Brazilian subsidiaries to their foreign-based parent companies.
Since the late 1950’s, Brazil’s laws dealing with IP royalty remittance have been in direct conflict with the approaches taken in most other countries. In particular, Brazilian laws established that Brazilian subsidiaries could only remit abroad and deduct royalties up to the limit of 5% of the net sales of the licensed goods.
In addition, the legislation fixed the deductibility ceilings for each type of licensed IP right and the field of activity (for trademarks the remittance and deduction ceilings were set at 1% of the net sales, while for patents the ceilings varied from between 1% and 5%, depending on the field of activity).
The approach in the Brazilian legislation led to many problems in other countries. In the US, for example, the so-called “Arms Length Principle” is adopted, which, in short, determines that the fees charged in a controlled transaction must be consistent with the results of a comparable uncontrolled transaction.
The US approach, which prescribes specific methods for calculating IP royalty rates for foreign subsidiaries, based on the specificities of the transaction in question, was at odds with the more rigid Brazilian position, leading to significant problems and litigation in the US courts. For more on this, access our recent article.
The new Brazilian law (which will enter into effect on December 31, 2022) changes the above position concerning remittance of royalties abroad. Companies must no longer register the related contracts with the Brazilian Central Bank, and the prohibition to remit royalties abroad in excess of the prescribed deductibility ceilings has been discontinued.
The new position represents a substantial step in modernizing the Brazilian market and the related tax laws, bringing the country in line with the approach of the OECD.
In addition, due to the new rules, companies doing business in Brazil may wish to reconsider their current contractual arrangements, since multiple agreements were often required in the past to deal with the unique position under Brazilian law and the resulting conflicts.
For further clarifications on this matter, please feel free to contact us. We will be glad to assist you.