Normative Instruction nº 1683 (NI 1683/16), published by the Brazilian Federal Revenue Agency on 30 December 2016, amended the definition of privileged tax regime (PTR) applicable to holding companies in Austria for Brazilian tax purposes. According to the new definition, the lack of substantial economic activity is a condition for a holding company in Austria to be included on the PTR list.
On 13 September 2016, Austrian holding companies were added to the list of PTRs by Normative Instruction nº 1658 (NI 1658/16).1 Unlike holding companies located in the Netherlands and Denmark, to which the absence of substantive economic activity was already relevant for the qualification as a PTR, this condition was not originally required for the Austrian holding companies. Therefore, regardless of the activity developed by Austrian holding companies, they were included on the PTR list. In this context, NI 1683/16 extends the treatment for holding companies in the Netherlands and Denmark to holding companies in Austria, establishing that they will only be included on the PTR list if they do not develop substantial economic activity in the country of their tax residence.
Inclusion of an entity on the list of PTRs triggers certain adverse tax consequences in Brazil, such as:
(i) The need to comply with Brazilian transfer pricing rules for transactions with such entity, even if it is not related to the Brazilian company
(ii) The application of more strict thin capitalization limits
(iii) Certain restrictions in the calculation of corporate income taxes in Brazil on the profits earned by foreign controlled companies if they are on the PTR list or controlled by an entity on the PTR list
In regard to the criteria to determine whether there is a substantial economic activity, NI 1658/16 established, for the holding companies in the Netherlands and Denmark, that a legal entity develops substantial economic activity if it holds, in its country of residence, adequate operational capacity to develop its corporate objective.
According to NI 1658/2016, operational capacity is evidenced by the existence of qualified employees in sufficient number and appropriate physical facilities for the management and actual decision making process related to: (i) the performance of activities with the purpose of earning income derived from its assets; or (ii) the administration of holding equity to receive profits and capital gains.
1. For further detail, see EY Global Tax Alert, Brazil updates lists of low-tax jurisdictions and privileged tax regimes, dated 16 September 2016.
EYG no. 00094-171Gbl