Nonresident reinsurers should review their processes and practices to ensure that they conform to the RFB's ruling in PLR No. 91/2018.

In PLR No. 91/2018 (August 2, 2018), the Brazilian tax authority (RFB) has ruled that the activities of representative offices established in Brazil by nonresident reinsurers (so-called admitted reinsurers under the Brazilian regulatory framework) may be restricted to mere ancillary types of activities, regardless of the ample powers granted to such representative offices under the Brazilian reinsurance law.

Background

On January 20, 2017, the RFB ruled, in PLR No. 62/2017, that representative offices established in Brazil by nonresident reinsurers should be treated the same as a reinsurer incorporated in Brazil for tax purposes. For more information, see Tax Alert 2017-0430.

The RFB determined that the activities of a Brazilian representative office of a nonresident reinsurer are not mere brokerage, preparatory or ancillary activities. Rather, the activities are reinsurance activities because, under Brazilian reinsurance law, the reinsurer's local representative (who is permanently based at the Brazilian representative office) has ample powers to bind the nonresident reinsurer with local insurers/reinsurers.

PLR No. 91/2018

In PLR No. 91/2018, the RFB changed its view on the scope of the activities of representative offices of nonresident reinsurers because of an exchange of official letters with the Brazilian insurance regulator (so-called SUSEP). In the letters, SUSEP stated that, even though certain representative offices have ample powers in accordance with Brazilian reinsurance law, their activities amount to mere commercial representation of the nonresident reinsurer, including interaction with SUSEP, resolution of regulatory issues or provision of technical and commercial assistance. The RFB's updated view is that the representative offices' activities may be restricted to mere ancillary types of activities regardless of the ample powers granted to those offices under Brazilian reinsurance law. The RFB implied that the analysis of the representative offices should be conducted on a case-by-case basis.

Generally, representative offices established in Brazil by nonresident reinsurers pay a 34% corporate income tax, while reinsurance premiums paid to nonresident reinsurers are subject to Brazilian withholding tax of 25% applicable to 8% of the gross premium, resulting in an effective withholding tax rate of 2%.

Implications

Nonresident reinsurers that have a representative office in Brazil should revisit their policies, processes, practices and files to confirm -both on a prospective and retrospective basis — that the scope of their activities in Brazil conforms with the RFB's view pursuant to PLR No. 91/2018. Where potential gaps are identified, nonresident reinsurers should take appropriate remediating actions — note that generally the Brazilian statute of limitation is five years.

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