The taxation of lack thereof of expenses and costs shared by companies of the same corporate group has been long discussed in Brazil.
The latest Federal Revenue Service statements on the issue occurred (i) in 2012, through the issuance of SC COSIT Answer to Advance Tax Ruling Request (“SC COSIT”) no. 8, in which the types of expenses and costs that can be considered as reimbursement when shared were listed; and (ii) in 2013, through COSIT Conflict Resolution Decision no. 23, in which the criteria for the reimbursement to be effectively characterized were established.
Despite the publication of both understandings, the Federal Revenue Service kept issuing directions stipulating the collection of federal taxes on amounts received by companies by way of reimbursement.
Recently, at the end of September 2021, the Federal Revenue Service issued SC COSIT no. 149, establishing the understanding in the sense that amounts received by a company from another of the same group by way of reimbursement for expenses and costs shared with activities of support and back-office areas, are not subject to taxation of Company Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS) and Contribution to Social Security Financing (COFINS).
The case that resulted in the publication of SC COSIT no. 149 involves a construction company with interest in several companies incorporated as Special Purpose Entity (“SPE”), very common in the real estate industry.
In the specific case, the construction company started to centralize expenses and costs of certain activities that were used by other related companies, among which are the human resources, accounting, technical and information departments.
The Federal Revenue Service indicated that, if the requirements provided for in SC COSIT no. 23/2013 for the purpose of characterization of reimbursement are met, such amounts would not be subject to the such federal taxation.
Among the criteria established by SC COSIT no. 23/2013, the need for the expenses and costs shared to be required and usual in the business activities, demonstrably corresponding to goods and services received and paid for, at any time, to relate to the target activity developed by the parties involved, should be mentioned.
Notwithstanding SC COSIT no. 149/21 providing for the domestic treatment of the allocation of costs and expenses, the same logic can be applied to transactions carried out between Brazilian companies and their related parties abroad, with particular attention to the fact that, if an inbound remittance is not deemed as reimbursement, there will be taxation by way of Withholding Income Tax of 15%, Contribution for Intervention in the Economic Domain (CIDE) of 10%, and PIS and COFINS in the import category of 9.65%.
Therefore, companies belonging to international groups are recommended to keep the appropriate contractual instruments and accurate bookkeeping of what is directly related to allocation/reimbursement.
Written by Camila Cabral, Tax Consultant at Drummond Advisors