Investing Today in Brazil: Addressing Recent Tax Challenges

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Investing Today in Brazil Addressing RecentTax
Challenges
Sponsored by
2
Thin Capitalization
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Restrictions to Deduction of Expenses

• Articles 24, 25 and 26 of Law 12,249
• Restrictions to the deduction of interest
  expenses paid to non-resident parties (Related
  Parties or Low Tax Jurisdictions or Privileged
  Tax Regimes)
• Restriction to the deduction of other expenses
  paid to non-resident parties domiciled in Low
  Tax Jurisdictions or Privileged Tax Regimes

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Thin Capitalization Rules

• Article 24 Concept
• interest paid or credited by Brazilian sources,
• to individuals or legal entities, considered
  related as set forth by article 23 of Law 9,430,
  resident or domiciled abroad,
• not incorporated in a country or territory with
  favorable taxation or subject to a privileged tax
  regime,
• will only be deductible if the interest expense
  is treated as necessary for the company
  activities and if certain legal requirements are
  met.

5
Thin Capitalization Rules

• Article 24 interest paid or credited by
  Brazilian sources
• Only credit transactions (loans, financing) or
  also interest on net equity? Specific rule for
  INE was implicitly repealed?
• Inclusion of EPP or installment sales?

6
Thin Capitalization Rules

• Article 24 to individuals or legal entities,
  considered related as set forth by article 23 of
  Law 9,430, resident or domiciled abroad
• Article 23 Head office, affiliate, branch,
  subsidiary, parent or associated company, under
  common corporate control
• Applicable to related parties that directly and
  indirectly participate in the capital or also for
  those that indirectly participate.
• Applicable to commercial relationships

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Thin Capitalization Rules

• Article 24 not incorporated in a country or
  territory with favorable taxation or subject to a
  privileged tax regime
• If country or dependency with favorable taxation
  or privileged tax regime articles 25 and 26

8
Thin Capitalization Rules

• Article 24 will only be deductible if the
  expenses are treated as necessary for the
  companys activities and if the requirements set
  forth in Brazilian tax laws are met
• Expenses paid or incurred in transactions or
  operations required for the companys activities
  i.e., those that are usual and normal for the
  type of transactions, operations or activities of
  the company.

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Thin Capitalization Rules

• Article 24 will only be deductible if the
  expenses are treated as necessary for the
  company activities and if the requirements set
  forth in Brazilian tax laws are met
•  
• (i) If direct participation, indebtedness may
  not be higher than 2x the share participation in
  the net equity of BrazilCo, on the date of the
  interest accrual
• If no direct participation, indebtedness may not
  be higher than 2x the net equity of BrazilCo, on
  the date of interest accrual
• (iii) If both tests are met, sum of
  indebtednesses with related parties may not be
  higher than 2x the sum of share participation of
  all related parties in BrazilCos net equity.

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Thin Capitalization Rules
USCo
FrCo
UKCo
90
10
20
20
BrCo
Loan USCo 200Loan FrCo 200Net Equity 100
11
Thin Capitalization Rules

• Article 24 Scope of the restriction
• Funding of all types and terms exception pass
  on transactions by financial institutions
• Whether or not the agreement is registered with
  the Central Bank of Brazil
• Debt transactions in which there is a guarantor
  (avalista or fiador), proxy or any intervening
  party that is considered a related party.

12
Thin Capitalization Rules

• Article 24 Consequences of excess expenses
• expenses will not be treated as necessary
• expenses will not be considered deductible for
  IRPJ and CSLL purposes. Formula to be issued

13
Thin Capitalization Rules

• Article 25 Concept
• interest paid or credited by Brazilian sources,
• to individuals or legal entities, incorporated in
  a country or dependency with favorable taxation
  or subject to a privileged tax regime,
• will only be deductible if the expenses are
  treated as necessary for the company activities
  and if the legal requirements are met.

14
Thin Capitalization Rules

• Article 25 Tax Havens
• Country or dependency with favorable taxation
  does not tax income or taxes it at a maximum rate
  lower than 20
• Privileged tax regime
• does not tax (local or foreign) income or taxes
  it at a maximum rate lower than 20
• grants tax benefits to a non-resident individual
  or legal entity without requiring (or contingent
  upon) substantial economic activity
• does not provide access to information on
  shareholding composition, ownership of goods or
  rights or the economic transactions carried out.

15
Thin Capitalization Rules

• Article 25 will only be deductible if the
  expenses are treated as necessary for the
  companys activities and if the legal
  requirements are met
• Expenses that are treated as necessary for the
  company activities and for the maintenance of
  its productive source.
• Expenses paid or incurred for the transactions or
  operations required for the companys activities.
  Accepted operational expenses are those that are
  usual and normal for the type of transactions,
  operations or activities of the company.

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Thin Capitalization Rules

• Article 25 will only be deductible if the
  expenses are treated as necessary for the
  companys activities and if the following legal
  requirement is met
• the overall amount of indebtedness with all
  entities located in a low tax jurisdiction or in
  a privileged tax regime is higher than 30 of the
  net equity of the Brazilian company.

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Thin Capitalization Rules
USCo
CaymanCo
LuxCo
90
10
20
20
BrCo
Loan LuxCo 200Loan CaymanCo 200Net Equity
100
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Thin Capitalization Rules

• Article 25 Scope of the restriction
• Funding of all types and terms exception pass
  on transactions by financial institutions
• Whether or not the agreement is registered with
  Central Bank of Brazil
• Debt transactions in which there is a guarantor
  (avalista or fiador), proxy or any intervening
  party that is a resident or domiciled in a
  country or dependency with favorable taxation or
  subject to privileged tax regime.

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Thin Capitalization Rules

• Article 25 Consequences of excesses
• expenses will not be treated as necessary
• expenses will not be considered deductible for
  income tax (IRPJ and CSLL) purposes. Formula to
  be issued

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Expenses in General

• Article 26 Concept
• Expenses for IRPJ and CSLL purposes are not
  deductible,
• if they derive from payment, credit, delivery,
  use or remittance at any title, directly or
  indirectly,
• to individuals or companies resident or
  incorporated abroad in a country or territory
  with favorable taxation, or subject to a
  privileged tax regime.
• Deduction three tests

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Expenses in General

• Article 26 Effective beneficiary
• The individual or company not incorporated with
  the sole or principal purpose of tax savings,
  that receives payments these values for its own
  account and not as agent, trustee or agent on
  behalf of a third entity.
• If the identification requirement is met, is
  the test accomplished?
• If the recipient located in a country or
  territory with favorable taxation is just an
  agent, but the effective beneficiary is
  identified, are the requirements met?
• How can the identification be formalized?
•   

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Expenses in General

• Article 26 of Law 12,249
• Expressions whose content and scope require a
  specification
• 1) "operational ability" - which requirements
  should be met?
• 2) "tax savings" - for whom?
• 3) tax savings as sole or principal purpose -
  how to determine?

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Transfer Pricing
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Transfer pricing Overview

• Brazilian transfer pricing rules are inconsistent
  with the internationally accepted Organization
  for Economic Co-operation and Development (OECD)
  guidelines
• Transfer pricing rules apply to the following
  related-party transactions
• Export of goods, services, or rights
• Import of goods, services, or rights and
• Interest bearing contracts not registered before
  the Brazilian Central Bank (Bacen).
• TP rules do not apply to royalties/technical/scien
  tific and administrative assistance (special
  rules apply to those transactions).

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Transfer pricing Comparison
OECD Equivalent
Exports
Imports
Market comparison - CUP
PVEX
PIC
CAP (15)
CPL (20)
Cost Plus method
PVV (30)
PRL (20)
Resale minus method
PRL (60)
PVA (15)
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Proposed resale minus method rejected

• The Brazilian Congress failed to approve two
  provisional measures published late last year
  that would have replaced the transfer pricing
  resale minus method (PRL) with the a new method,
  known as PVL from its Portuguese acronym
• Provisional Measure No. 476/09 (PM 476),
  published on 24 December 2009, and Provisional
  Measure No. 478/09 (PM 478), published on 29
  December 2009, were not approved by the Brazilian
  Congress within the constitutionally established
  legal time frame, and thus lost their
  effectiveness as of the date of their enactment
• PM 478 introduced significant changes to
  Brazilian transfer pricing regulations, revoking
  the PRL 20/60 (the resale minus method), and
  introduced a new method, known as PVL 35. PM
  476/09 was known for revoking article 61, II of
  Provisional Measure No. 472/09, published on 12
  December 2009, which in turn revoked the margins
  on the resale minus PRL method

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Proposed provisional measures - summary
PM 472 PM 476 PM 478
Main change Article 61, II revoked the transfer pricing margins of resale minus method (PLR) as set forth by article 2 of Law 9,959/00 Revoked article 61, II of PM 472, and reintroduces the margins set forth by article 2 of Law 9,959/00 that were previously revoked by PM 472 Introduced the new PVL method and replaces the PRL 20/60 from January 1, 2010 onwards
Enactment 12/15/2009 12/24/2009 12/29/2009
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Proposed provisional measures - timeline

• PM 472 was approved by the Brazilian Congress and
  converted into Law No. 12,249/2010, published on
  June 14, 2010
• The wording of Law 12,249/2010, however, did not
  include the article that revoked the transfer
  pricing margins of the resale minus method as set
  forth by article 2 of Law 9,959/00. From that
  perspective, there is a significant controversy
  whether the original provisional measure (which
  did include the revocation of the transfer
  pricing margins) should be in effect in the year
  of its enactment, that is, 2009

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PRL 20/60 x (proposed) PVL 35
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Resale minus method comparative
Description PRL 20 PRL 60 PVL 35
Applicability Imported goods or rights from related parties that are resold in Brazil. Applicability of services only provided by Normative Instruction, but not in the Law. Imported goods from related parties subject to aggregation value and resold in Brazil Imported goods, services. or rights from related parties resold in Brazil
Statutory margins 20 60 35
Profit margin basis Gross Resale Price NRP less aggregation value in Brazil Proportional NRP less proportional CGS
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What changes are expected?

• It is expected that the Brazilian tax authorities
  will try to reintroduce a new resale minus
  method this year, which would be, in principle,
  in force from 2011 if enacted
• There are also current proposals and discussions
  with the Brazilian transfer pricing tax
  authorities in order to include different sector
  margins on the resale minus method, clarify some
  other uncertainties which where introduced by
  Provisional Measure 478, as well as other
  inconsistencies in the application of the
  transfer pricing methods

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Resolution 2,689Financial Markets
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1 - General Rules

• Pursuant to Resolution 2,689, foreign investors
  are entitled to perform investments in the
  Brazilian financial and capital markets by
  investing in
• fixed income instruments (bonds, certificates of
  deposit, debentures)
• derivative instruments (swaps, futures, forwards,
  flexible options)
• securities (stock, stock options, stock index,
  warrants)
• mutual funds and
• other financial instruments generally available
  to Brazilian residents.
• According to Resolution 2,689, any investor
  residing outside Brazil shall comply with the
  following requirements
• appointment of an agent (individual or legal
  entity) in Brazil for the purposes of
  representing such investor before third parties
  (who may or may not be the local representative
  for tax purposes) (Agent). If this Agent is not
  a financial institution duly authorized to
  operate in Brazil, the foreign investor should
  appoint a financial institution to be co-obliged
  for the compliance of certain obligations that
  should be observed pursuant to the applicable
  regulation with respect to investments performed
  under Resolution 2,689
• fulfillment of the application form attached to
  Resolution 2,689
• enrollment with the Brazilian Securities
  Commission (Comissão de Valores Mobiliários
  CVM), and the Brazilian Taxpayers Registry
  (Cadastro Nacional de Pessoas Físicas CPF, or
  Cadastro Nacional de Pessoas Jurídicas CNPJ,
  as applicable) and
• registration with the Central Bank of Brazil
  (BACEN).

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1 - General Rules

• The foreign investor shall enter into a custody
  agreement with a financial institution authorized
  to render such service (pursuant to Article 5,
  III, of CVM Instruction No. 325).
• Proceeds remitted to Brazil for the purposes of
  investing in the Brazilian financial and capital
  markets under Resolution 2,689 should not be
  invested in transactions
• carried out outside stock or commodities
  exchange, electronic systems or organized
  over-the-counter (OTC) market of securities of
  publicly-held companies duly registered for
  negotiation on such markets and
• involving securities or financial instruments
  traded on non-organized OTC markets or on markets
  that are organized by entities not authorized by
  the CVM.
• Such limitations do not include initial
  subscriptions, payments of bonuses, conversions
  of convertible debentures into shares, indexes
  referenced in securities, purchases or sales of
  quotas of open-ended investment funds and, if
  previously approved by CVM, delistings, trading
  cancellations or suspensions, judicial agreements
  and the disposition of shares subject to
  shareholders agreements.
• All proceeds, assets and securities held and
  traded by foreign investors under Resolution
  2,689 should be registered with or deposited in
  institutions or entities authorized to render
  registration and custody services by the BACEN or
  the CVM or be registered in clearing systems
  recognized by the BACEN or by the CVM.
• The transfer and/or assignment of such
  investments abroad are not allowed, except in the
  case of merger, amalgamation, spin-off, corporate
  reorganization and succession, provided that the
  regulation issued by the BACEN and the CVM are
  complied with.

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2 - Special Regime for 2689 Investors

• Foreign investors, not located in Low Tax
  Jurisdictions (LTJs), as provided by Brazilian
  Law (for further details on LTJs please refer to
  section 03), that invest in Brazilian financial
  and capital markets, pursuant to the rules ser
  forth by Resolution No. 2,689 (2,689
  Investors), are subject to a special tax regime
  in connection with the withholding income tax
  (WHT) imposed on gains and earnings related to
  such investment.
• In this sense, capital gains derived upon
  disposal of shares and other securities, such as
  quotas of closed-end investment funds, by the
  2,689 Investor performed in the stock exchange
  market or an Organized OTC are exempt from
  withholding tax (WHT).
• Further, earnings derived by the 2,689 Investors,
  generated by the assets composing their
  investment portfolio, are subject to
• WHT at a 10 rate, in relation to investments in
  variable income investment funds, swap
  transactions and transactions in the future
  market, outside the stock exchange and
• WHT at a 15 rate in all other cases, including
  fixed income investments.
•  
• On the inflow of funds to Brazil, in general, the
  exchange transaction carried out by a 2,689
  Investor in order to invest in Brazilian
  financial and capital markets is currently
  subject to the Tax on Exchange Transactions
  (IOF/Exchange) at a 2 rate.
• The exchange transactions carried out for the
  outflow of funds from Brazil to abroad in
  connection with return of capital of 2,689
  Investors currently benefits from the zero
  percent rate of IOF/Exchange.
• ,

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2 - Special Regime for 2689 Investors

• On the other hand, if the 2,689 Investor resides
  in a LTJ, the tax regime applicable to it will be
  the same regime applicable to Brazilian residents
  in connection with investments in Brazilian
  financial and capital markets.
• Therefore, capital gains derived upon disposal of
  shares and other securities by the foreign
  investor are subject to WHT at a 15 rate.
  Further, earnings derived by the foreign
  investors resident in LTJs, including earnings
  from fixed income investments and investments in
  open-end investment funds are subject to WHT at
  general rates varying from 22,5 to 15,
  depending on the type and lifetime of the
  investment.
• The main tax advantage on the conversion of a
  2,689 Investment over a 4131 Investment is that
  the foreign investor can benefit from the
  non-imposition or reduction of the WHT in future
  capital gains to the extent that it sells in the
  future its shares in the Stock Exchange Market
  with gains and it is not located in a low tax
  jurisdiction.
• Please find below the detailed taxation for 2,689
  Investor on the following types of investments
• Direct investments in shares
• Fixed income investments
• Share fund FIA
• Private equity fund FIP and
• Credit Rights Fund FIDC.

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2.1 Direct Investments in Shares

• Tax Aspects
• The inflow of funds into Brazil for the
  acquisition of shares is subject to the
  IOF/Exchange which currently is imposed at a 2
• Dividend and Interest on Equity (IE) (which is
  hybrid form of dividend distribution provided for
  in Brazilian law) paid by the invested company to
  the Foreign Investor, as well as the repatriation
  of the invested capital, is currently subject to
  IOF/Exchange at a 0 rate.
• Dividends paid by the invested company are not
  subject to WHT
• IE paid by the invested company is subject to WHT
  at a 15 rate, provided that the Foreign Investor
  (as a 2689 Investor) not located in a LTJ (if
  located in a LTJ, a 25 rate applies)
• Capital gains recognized upon the disposal of
  shares are not subject to WHT, in the event the
  Foreign Investor is not located in a LTJ or at a
  15 rate, if the Foreign Investor is located in a
  LTJ.

Foreign Investor
Acquisition of Shares in the Stock Exchange Market
Abroad
Brazil
Publicly Held Corporation
38
2.2 Fixed Income Investments

• Tax Aspects
• The inflow of funds into Brazil for the
  acquisition of shares is subject to the
  IOF/Exchange which currently is imposed at a 2
• The outflow of the investment, including gains
  and earnings, will be subject to IOF/Exchange at
  a 0 rate
• Earning derived by the Foreign Investor in
  connection with the fixed income investment will
  be subject to WHT at a 15 rate, provided that
  such investor is not located in a LTJ
• If the investor is located in a LTJ, the WHT
  would be imposed at rates varying from 22.5 to
  15, depending on the lifetime of the investment.

Foreign Investor
Acquisition of Bonds or other fixed income
instruments
Abroad
Brazil
Fixed Income Investments
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2.3 Share Fund - FIA

• Tax Aspects
• The inflow of funds into Brazil for the
  acquisition or subscription of quotas is subject
  to IOF/Exchange at a 2 rate.
• The outflow of the investment, including gains
  and earnings, in connection with the Share Fund
  will be subject to IOF/Exchange at a 0 rate.
• If the Foreign Investor is located outside a LTJ,
  gains recognized upon disposal of the quotas of
  closed end funds in the stock exchange market or
  an Organized OTC are exempt of WHT.
• If the Foreign Investor is located in a LTJ, such
  gains would be subject to WHT at a 15 rate.
• Earnings to be received by the Foreign Investor
  would be subject to WHT at a 10 rate.
• In the event the Foreign Investor is located in a
  LTJ, such earnings would be subject to WHT at a
  15.

Subcription/Acquisition of Quotas of a FIA
Foreign Investor
Abroad
Brazil
FIA
40
2.4 Private Equity Fund - FIP

• Tax Aspects
• The inflow of funds into Brazil for the
  acquisition or subscription of quotas is subject
  to IOF/Exchange at a 2 rate.
• The outflow of gains and earnings in connection
  with the FIP will be subject to IOF/Exchange at a
  0 rate.
• If the quotaholders are located outside of a LTJ,
  gains and earnings recognized by the 2.689
  Investor as a result of the amortization of
  quotas of the FIP will be subject to the
  imposition of the WHT at a 0 (zero percent)
  rate.
• This 0 WHT rate would not apply if (i) the
  foreign quotaholder holds (directly or via
  related parties) at least 40 of the quotas of
  the FIP or of the quotas that represent the right
  to receive more than 40 of the earnings of the
  FIP (ii) the FIP has, at any time, debt bonds
  corresponding to more than 5 of its net worth,
  or (iii) the foreign investor is domiciled in a
  LTJ.
• If the 2689 Investor is resident in a LTJ, it
  will be subject to the same tax treatment
  applicable to Brazilian investors

Subcription/Acquisition of Quotas of a FIP
Foreign Investor
Abroad
Brazil
FIP
41
2.4 Private Equity Fund - FIP

• Tax Aspects (cont.)
• Therefore, gains and earnings recognized by
  quotaholders of the FIP would only be taxable on
  the sale or amortization of the corresponding
  quotas. In this context, those gains and earnings
  would be subject to the imposition of the WHT at
  a 15 rate.
• Such tax treatment is conditioned upon fulfilment
  of the following requirements (i) the portfolio
  of the FIP must be composed by at least 67 of
  shares of corporations (S.A.), convertible
  debentures and subscription bonds, and (ii)
  diversification limits and rules provided for in
  the regulations of CVM must be observed. If these
  two requirements were not met, gains and earnings
  recognized by quotaholders would be subject to
  WHT at aggregate rates varying from 22.5 to 15,
  depending on the lifetime of the investment in
  the FIP.

Subcription/Acquisition of Quotas of a FIP
Foreign Investor
Abroad
Brazil
FIP
42
2.5 Credit Rights Fund FIDC

• Tax Aspects
• The inflow of funds into Brazil for the
  acquisition or subscription of quotas is subject
  to IOF/Exchange at a 2 rate.
• The outflow of the investment, including gains
  and earnings, in connection with the FIDC will be
  subject to IOF/Exchange at a 0 rate.
• If the Foreign Investor is located outside a LTJ,
  gains recognized upon disposal of the quotas of
  closed-end funds in the stock exchange market or
  an Organized OTC are exempt of WHT.
• If the Foreign Investor is located in a LTJ, such
  gains would be subject to WHT at a 15 rate.
• Earnings to be received by the Foreign Investor
  upon redemption or amortization of quotas would
  be subject to WHT at a 15 rate, in the event
  such investor is not located in a LTJ.
• In the event the Foreign Investor is located in a
  LTJ, such earnings would be subject to WHT at
  rates varying from 22,5 to 15, depending on the
  lifetime of the investment.
• It is important to mention that the same tax
  treatment described above is applicable to
  Multimarket Funds.

Subcription/Acquisition of Quotas of a FIDC
Foreign Investor
Abroad
Brazil
FIDC
43
3 - Comments on the Concept of Low Tax
Jurisdictions and Privileged Tax Regimes

• Until December 2008, under Brazilian tax law, a
  LTJ was a country or location that does not
  impose taxation on income, or imposes the income
  tax at a rate lower than 20 or where the laws of
  that country or location impose restrictions on
  the disclosure of shareholding composition or the
  ownership of the investment. There was a list of
  LTJ enacted by the Brazilian Revenue Service by
  means of Normative Instruction 188/2002. More
  recently, some amendments were implemented in
  connection with the concept of LTJ, via Law
  11,727/08, in force as of January 2009, in order
  to include in said concept the provision in the
  sense that the country or location which imposes
  restrictions on the disclosure of shareholding
  composition or the ownership of the investment
  should also be considered as a LTJ. Additionally,
  Law 11,727/08 also created the concept of
  privileged tax regimes.
• In 2010, a new list was enacted by the Brazilian
  Revenue Service, via Normative Instruction
  1,037/10 (IN 1,037/10), which included both the
  countries considered as LTJs and the locations
  considered as granting privileged tax regimes
  (PTR).
• In our view, there are solid legal grounds to
  sustain that the list should be interpreted as a
  comprehensive list, so that only the countries
  and locations listed should be viewed as LTJs and
  privileged tax regimes, according to their
  specific qualification. Further, in our opinion,
  there are solid legal grounds to sustain that the
  concept of privileged tax regime only applies for
  the purposes of transfer pricing rules and thin
  capitalization rules.
• Please find below the countries included in the
  new list.

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3 - Comments on the Concept of Low Tax
Jurisdictions and Privileged Tax Regimes

• Andorra, Anguilla, Antigua and Barbuda, Dutch
  Antilles, Aruba, Ascension Island, Bahamas,
  Bahrain, Barbados, Belize, Bermudas, Brunei,
  Campione DItalia, Canal Island (Jersey,
  Guernsey, Alderney and Sark), Cayman Island,
  Cyprus, Singapore, Cook Island, Costa Rica,
  Djibouti, Dominica, United Arab Emirates,
  Gibraltar, Grenada, Hong Kong, Kiribati, Lebuan,
  Liban, Liberia, Liechtenstein, Macau, Madeira
  Island, Maldives, Man Island, Marshall Island,
  Mauricio Island, Monaco, Montserrat Island,
  Nauru, Niue Island, Norfolk Island, Sultanate of
  Oman, Panama, Pitcairn Islands, French Polynesia,
  Queshm Island, San Cristovan and Nevis, American
  Samoa, West Samoa, San Marino, Saint Helena
  Island, St. Peter and Miguelão Island, Saint
  Vincent, Santa Lucia, Seychelles, St. Kitts and
  Nevis, Solomon Islands, Swaziland, Switzerland,
  Tonga, Turks and Caicos Islands, Vanuatu,
  American Virgin Islands, British Virgin Island
  and Tristan da Cunha.
• According to IN 1,037/10 are PTRs
• in what concerns the legislation of Luxembourg,
  the regime applicable to the holding companies
• in reference to the Uruguayan legislation, the
  regime applicable to the Financial Investment
  Companies (Safis), until December 31st, 2010
• in respect with the legislation of Denmark, the
  regime applicable to the holding companies which
  do not develop substantial economic activity
• regarding the Netherlands legislation, the regime
  applicable to the holding companies which do not
  develop substantial economic activity
• in relation with the legislation of Iceland, the
  regime applicable to the International Trading
  Companies (ITC)

45
3 - Comments on the Concept of Low Tax
Jurisdictions and Privileged Tax Regimes

• in reference to the Hungarian legislation, the
  regime applicable to the companies incorporated
  as KFT offshore
• in what concerns the legislation of the United
  States of America, the regime applicable to the
  companies incorporated as state Limited Liability
  Company (LLC), whose shareholding control is
  composed of non-residents, not subject to the
  federal income tax
• regarding the Spanish legislation, the regime
  applicable to the companies incorporated as
  Entidad de Tenencia de Valores Extranjeros
  (E.T.V.Es), and
• in connection with the legislation of Malta, the
  regime applicable to the International Trading
  Companies (ITC) and the International Holding
  Companies (IHC).
• On June 23rd, 2010, was enacted Normative
  Instruction n. 1,045, which altered IN 1,037/10.
  According to IN 1,045, the jurisdictions
  mentioned on sections 1 and 2 of IN 1,037/10 may
  file a request for revision of its
  characterization as LTJ or PTR. This request
  shall be forward by a representative of the
  countries government and shall be addressed to
  the BIRS Secretary. It shall be accompanied by
  proof of the content and effectiveness of tax
  legislation, which enables to review the
  classification. This request may grant suspensive
  effects in relation to the tax impacts involving
  the requestor jurisdiction, at the BIRS Secretary
  discretion.
• On June 25th, 2010 were published Normative Acts
  10 and 11, which declare that Switzerland and
  Netherlands have filed the referred request.
  During the analysis of the request, the force of
  the list on these two countries has been
  suspended. As this procedure is new, we are not
  able to inform how long will it take to BIRS to
  issue a conclusion on the matter.

46
4 Recent Challenges 2,689 Investor included in
LTJ by IN 1,037

• According to abovementioned new list, were added
  to the LTJ roll Ascension Island, Brunei,
  Kiribati, Norfolk Island, Pitcairn Islands,
  French Polynesia, Queshm Island, Saint Helena
  Island, St. Peter and Miguelão Island, Solomon
  Islands, St. Kitts and Nevis, Swaziland,
  Switzerland and Tristan da Cunha.
• Therefore, it is possible that a 2,689 Investor,
  that was not incorporated in a LTJ before, due to
  the enactment of IN 1,037 list, now its
  considered to be located in a country deemed to
  be a LTJ by the Brazilian Tax Authorities.
• In light of the issue presented above, the
  following solutions are feasible
• Liquidation of the assets. The investor would
  liquidated the current assets and then reinvest
  in Brazil as a 4,131 Investor. In this case, the
  rate increase is not avoided, but it limits the
  costs to past operations. An alternative that can
  be implemented in relation to this one is
  withdraw of the investments, transfer of the
  assets abroad to a country which is not
  considered a LTJ and then, after the transfer is
  completed, reinvest from the other country
• Merger, amalgamation, spin-off, corporate
  reorganization and succession abroad
• Drop-down of the 2,689 Investments, as this
  operation is considered by the CVM as a corporate
  reorganization abroad (past CVM rulings were in
  this sense) and
• Change of the companys location abroad. It is
  important to bear in mind that the entity must
  remain the same, despite of the change of
  location.

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