January 9, 2024
Brazilian Government changes rules related to incentives treatment, interest on net equity, and other provisions for 2024
On 29 December 2023, Law No. 14,789 was published in an extra edition of the Official Gazette, establishing relevant changes to the corporate income tax calculation in Brazil. This law arises from the conversion of the Provisional Measure No. 1,185/2023 (PM No. 1,185), originally published on 30 August 2023, and it shall be effective as from 1 January 2024.
One highlight of Law No. 14,789, which became effective on 01 January 2024, is new tax treatment for tax incentives for the purpose of calculating Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) due to (i) the revocation of article 30 of Federal Law No. 12,973/2014 and (ii) the institution of a tax credit for implementing or expanding an economic enterprise.
In accordance with the legislation in force up until 31 December 2023, tax incentives (e.g., presumed credits and exemptions and/or reductions of the calculation base) granted by other governmental bodies (e.g., states and municipalities) could be excluded from the calculation of the IRPJ and CSLL, provided that the amounts were allocated to a reserve account in the companies' net equity. In addition, these tax incentives could be excluded from the calculation of the Program of Social Integration (PIS) and Contribution for the Financing of Social Security (COFINS), which are turnover taxes levied over gross revenue.
With the enactment of Law No. 14,789, the amounts connected with these tax incentives will no longer be excluded from the taxable basis of IRPJ, CSLL, PIS and COFINS. However, if the tax incentive is related to expansion/modernization projects carried out jointly with a public entity/authority, tax credits up to 25% may be granted. They would be subject to prior authorization by the Federal tax authorities and could be used to offset other Federal tax liabilities or as a refund.
Due to this change in the mechanics of the benefit, an increase in the tax burden is expected to the extent that the prior savings amounting up to 43.25% (34% pertaining to IRPJ and CSLL, and 3.65% to 9.25% related to PIS and COFINS) shall be replaced by a tax credit of only 25%.
In addition, to calculate the tax credit, only incentivized revenues that (i) are related to the implementation or expansion of the economic enterprise and (ii) are recognized after the filing of the authorization request could be computed. Furthermore, only revenues (i) that are related to depreciation, amortization, depletion, rental or leasing of capital assets and (ii) that have been computed in the IRPJ and CSLL calculation basis shall be admitted.
Law No. 14,789 also expressly prohibits the following from being considered when calculating the tax credit: (i) the portion of revenue that exceeds the value of the expenses related to depreciation, amortization, depletion, rental or lease of capital assets; (ii) the portion of revenue that exceeds the incentive granted by a governmental body; and (iii) the revenues arising from IRPJ incentives and the tax credit itself.
Lastly, other changes introduced by Law No. 14,789 include: (i) incentivized revenues shall be computed and taxed in the annual adjustment rather than in the monthly estimates for IRPJ and CSLL purposes; (ii) incentivized revenues may not be excluded from the calculation of incentivized operating profits (i.e., lucro da exploração); (iii) a special tax-transaction modality has been introduced; and (iv) taxpayers now have the option to self-regularize liabilities connected with the exclusion of incentivized amounts that did not comply with article 30 of Law No. 12,973/2014 while this provision was still in force.
Brazilian tax authorities have forecasted that the special tax-transaction and self-regularization procedures will reduce their consolidated open liability balance by up to 80% if taxpayers opt for the payment in up to 12 successive monthly installments, or by smaller percentages — such as 50% or 35% — for payments considered from 13 to 84 monthly and successive installments.
The final text of the new law provides for the reduction of the INE calculation basis by determining the exclusion of values for calculation purposes. These limitations may include:
This limitation is expected to reduce the distributable INE amounts every year starting from 2024.
INE was introduced in the Brazilian tax system in 1995 to attract new investments to Brazil by creating a deductible mechanism to remunerate shareholders and compensate loss of value of investments due to local inflation. (For background, see EY Global Tax Alert, Brazilian Government proposes the elimination of interest on net equity deduction, dated 6 September 2023).
Law No. 14,789 granted a presumed credit on revenue arising from the provision of regular intercity passenger road transport services and regular interstate passenger road transport services. The presumed credit shall be deducted from the calculation basis of PIS and COFINS from 1 January 2024 to 31 December 2026.
The presumed credit shall be calculated by multiplying the percentages corresponding to the rates of PIS and COFINS over the gross revenue, reduced by (i) 33.33% from 1 January to 31 December 2024 and by (ii) 50% from 1 January 2025 to 31 December 2026.
Amounts that a FIP receives from its investee companies, including dividends and INE, or due to investment amortization or liquidation, shall not subject to withholding tax (IRRF — Portuguese acronym), if the FIP reinvests these amounts in authorized assets within the period established for the classification of its portfolio, in accordance with the regulations of the Securities and Exchange Commission (CVM — Portuguese acronym). In such case, the corresponding amount shall be transferred from the subaccount of the original investment to the subaccount of the new investment.