Brazilian Regulations List Delaware as a Tax Haven

Oct 14, 2010   

Article 23 of Brazilian Law No. 11.727 became effective on January 1, 2009 defining a “privileged fiscal regime” for transfer pricing purposes. The law defined privileged fiscal regime (“regime fiscal privelegiado”) as any jurisdiction that met one of the following requirements:

A) It does not tax income or where the maximum applicable rate is below 20 percent;

B) It grants fiscal advantages to a non-resident individual or legal entity

  1. without requiring that substantial economic activity be made in the country or dependency; or
  2. conditioned to the non=exercise of substantial economic activity in the country or dependency

C) It does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20 percent to such earnings;

D) It does not permit access to information regarding the capital stock structure, ownership of assets or rights or to the economic transaction entered into between the parties.

Pursuant to this law, the taxing authority in Brazil issued Normative Instruction 1037/2010, which includes specific jurisdictions on a list of “privileged fiscal regimes.” Delaware appears on this list.

In the case of the United States of America, the regime applied to the entities incorporated in the form of Limited Liability Company (LLC) whose equity participation is formed by non resident, which are not subject to federal income tax, such as Delaware, Nevada, Florida and other US states which adopt a similar regime . . . .

When a jurisdiction is included in the list of privileged fiscal regimes, entities of this jurisdiction are required to obey all Brazilian transfer pricing rules. Thus, all earnings and profits relating to import and export operations with Brazil must be adjusted and taxed as if the transaction was subject to Brazilian taxes.

Commentators are questioning the Brazilian regulation, wondering “how a state can have a privileged tax regime when the state is not the taxing jurisdiction in question.” The regulation shows the Brazilian Taxing Authoritys lack of understanding of the United States Federal Income Tax. Although LLCs in Delaware and other states are pass-through entities, the United States Internal Revenue Service is given the responsibility to ensure that LLC owners pay their respective tax liability for income generated by the LLC. Normative Instruction 1037/2010 implies that the Brazilian Taxing Authority believes that Delaware has that responsibility instead.

Because the United States usually only taxes the worldwide income of its residents, this rule is likely to impact all LLCs formed in the United States with nonresident owners. Responding to these and other potential consequences, Delaware Chief Deputy Secretary of State, Richard Geisenburger announced Delawares plans to speak to Brazilian tax authorities in an effort to persuade them not to place Delawares LLCs on its list of “tax havens.” Notably, the Brazilian government does have discretion to require the Secretary of the Brazilian Federal Revenue office to review and edit the list included In Normative Instruction 1037/2010.

It is possible that the rule may exempt LLCs whose nonresident owners pay U.S. tax on U.S. source income. However, the actual impact of this regulation is still unknown.

If you have any questions regarding the Normative Instruction 1037/2010 or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.