On the last day of 2022, the New Foreign Exchange Framework (Law No. 14,286/2021) came into force, updating the rules on the foreign exchange market and on the provision of information to the Central Bank of Brazil – BACEN, among other aspects. The changes included the following provisions:
- the possibility of stipulating payment in foreign currency of enforceable obligations in the Brazilian territory in certain situations;
- the attribution of responsibility to customers of commercial banks for the classification of the operation’s purpose in the foreign exchange market;
- the possibility of private compensation for claims1 or outstanding amounts between residents and non-residents in Brazil;
- the exemption of the need for BACEN’s approval in respect of remittances of royalties for the use of trademarks, exploitation of patents and remuneration for the provision of scientific, administrative, and similar technical assistance services, for example (in such cases, only proof of payment of due income tax will be required).
Another legislative novelty was the publication of Provisional Measure No. 1,152/2022 (“MP 1.152/2022”) on December 29, 2022. The purpose of this measure is to amend the Brazilian legislation on corporate income tax (“IRPJ”) and social contribution on net income (“CSLL”), and to dispose of the transfer pricing rules applicable to controlled transactions2 (i.e., involving related parties).3
In order to align Brazilian legislation with international market standards, and with a nod to the principles and guidelines determined by the OECD (which Brazil is in the process of joining), MP 1.152/2022 establishes that, in order to determine the commercial conditions of a controlled transaction, the parties must follow the arm’s length principle, which determines that the trading conditions of a controlled transaction shall be defined on the basis of terms and conditions similar to those negotiated between independent parties in comparable transactions.
This change provides greater freedom of negotiation for related companies, especially when correlating this model to transfer pricing rules and the fixed royalty ceiling, which have been in force in Brazil.4
In the context of intellectual property in Brazil, MP 1.152/2022 expressly states that the terms and conditions for controlled transactions involving intangible assets must follow the rules established therein. Thus, related parties will have more freedom to negotiate the commercial terms of contracts involving the transfer and licensing of intellectual property rights (trademarks, patents, know-how, among others), according to the values and conditions practiced in the market. This change is in line with the measures adopted in the New Foreign Exchange Framework and the Economic Freedom Act.5
Further, MP 1.152/2022 determined the end of the deductibility limits arising from the payment of royalties for the exploitation of trademarks and patents, technical, scientific, administrative or similar assistance, through the revocation of several legal provisions of a tax nature. Such provisions established that only the sum of the amounts due as ‘royalties’ could be deducted from the gross profit’ by the exploitation of industry and trade marks and patents, by technical, scientific, administrative or similar assistance up to a maximum of 5% of the gross revenue of the product manufactured or sold”, according to the percentages established by Ordinance No. 436/58 of BACEN, considering an exceeded classification as to the degree of essentiality of products in the Brazilian industry.
It should be noted, however, that, pursuant to Article 45 of MP 1,152/2022, payments will not be deductible in the following situations: (i) royalty amounts paid to entities resident or domiciled in a country or dependency with favored taxation or that are beneficiaries of a privileged tax regime; and (ii) when the deduction of the amounts results in double non-taxation.
MP 1.152/2022 will enter into force from January 1, 2024. However, since last January 1st, taxpayers can already choose to subject their business transactions to the new transfer pricing model. Nevertheless, it is important to emphasize that MP 1.152/2022 should be evaluated and converted into law by the National Congress within a maximum period of 120 days from its publication, following the process provided for in Article 62, and other provisions, in the Federal Constitution. Otherwise, it will lose its effectiveness.
Finally, BACEN issued Resolution 277 of December 31, 2022, regulating the New Foreign Exchange Framework. To that end, it provides that commercial banks should ensure that payment instructions are accompanied by certain information relating to the sender and beneficiary of resources abroad.
Undoubtedly, all these movements indicate an important change to our legislation, to reduce bureaucracy and allow companies to negotiate the commercial conditions applicable to transactions more freely, following the practices adopted in the global market.
Our team is following the matter closely and will follow up with more information and news from the competent authorities.
We are available to provide further clarification on the subject, if required.
1 Private credit clearing is clearing, among residents and non-residents in Brazil, without exchange rate, through simple accounting entries (this practice was prohibited before the New Foreign Exchange Framework).
2 Article 3 of MP 1,152 defines controlled transactions as any commercial or financial relationship between two or more related parties, established or performed directly or indirectly, including contracts or arrangements in any form and series of transactions.
3 Article 4 of MP 1,152 established that the parties are considered related when at least one of them is subject to influence, exercised directly or indirectly by another party, which may lead to the establishment of terms and conditions in their transactions that differentiate them from those that would be established between unrelated parties in comparable transactions. Article 4 also provides a list of parties presumed to be related, such as the controller and its subsidiaries, related companies, among other hypotheses.
4 Until now, the Brazilian transfer pricing legislation in force was systematized by Law No. 9,430/1996, which does not follow the best practices suggested by the OECD. This law was heavily criticized. internationally, as it pre-determined maximum fixed metrics for the calculation of transfer prices (minimum amounts of taxable revenue and maximum deductible expenses), which are not necessarily consistent with the values practiced internationally Until now, the Brazilian transfer pricing legislation in force was systematized by Law No. 9,430/1996, which does not follow the best practices suggested by the OECD. This law was heavily criticized. internationally, as it pre-determined maximum fixed metrics for the calculation of transfer prices (minimum amounts of taxable revenue and maximum deductible expenses), which are not necessarily consistent with the values practiced internationally.
5 Generally speaking, the Economic Freedom Act (Law no. 13.874/19) deals with the protection of free enterprise and the free exercise of economic activities.