Good news for Luxembourg from Brazil
Business between Brazil and Luxembourg will be easier in the future. Luxembourg has been removed from a so-called Grey List and holding companies will no longer be subject to restrictions from the Brazilian Tax Authorities. In an interview with LFF, Guilherme Bezerril, Head of the Latin America desk at SGG, speaks about this new situation and the consequences for Luxembourg holding companies. SGG is a Luxembourg based companyoffering global expertise in the fields of Corporate, Family Office and Fund’s services.
Luxembourg has been removed from the Brazilian List of Privileged Tax Regimes. How will this help to promote Luxembourg products and services?
It will enormously help promoting Luxembourg products and services, becausecoming off the so-called Grey List, means that Luxembourg Holding Companies will no longer be subject to restrictions from the Brazilian Tax Authorities, which aimed to penalise countries or dependencies deemed to have too favorable tax treatment and preferential tax regimes.
In technical terms, that means that Luxembourg Holding Companies, from 28th March 2011 onwards, are no longer subject to any restrictions concerning “Thin Capitalization” and “Transfer Pricing” rules, that is, the partial loss of deductibility for Brazilian tax purposes of interest and other expenses on the part of the Brazilian counterpart in transactions of payments of interest on loans, remittances of capital gains or services rendered by them to the applicable foreign holding, subsidiaries or affiliated companies.
Moreover, this is a comparative advantage to Luxembourg given the fact that other countries such as The Netherlands, Spain, USA, Denmark, Uruguay and Malta remain on the Grey List (each for a specified reason), and thus continue to be subject to unfavourable tax treatment in Brazil.
Why is it now easier to do business with Brazil?
It is easier because now there are no more uncertainties as to the tax treatment that the Brazilian Tax authorities would adopt in transactions by and between Luxembourg-based holding companies or other companies, and their Brazilian counterparts (whether parents or subsidiaries).
The ruling refers to “Holding 29’s” – the famous 1929 holding company structure that no longer exists in Luxembourg - and to Luxembourg companies in general that function in a holding capacity. Does this mean that there are no longer any Luxembourg companies on Brazilian grey lists?
As above explained, it really means that Luxembourg is not listed at all. Historically, due to the Tax Exemption regime of the Holding Companies of the law of 1929 (the “H29s”), which existed in Luxembourg and were abolished for good at the end of 2010, Luxembourg had been listed in Brazil's Grey List (the one that includes countries that do not tax income or tax it at a rate below 20% as well as countries where domestic legislation does not allow access to information concerning the ownership structure of corporations or their ownership). These were also known as Tax Haven countries.
It is without a doubt that the inclusion of Luxembourg in that List was caused solely by the existence of the H29s (this was explicitly stated in the legal text).
For an unknown reason, while the text of IN 1037 of June 2010 took Luxembourg out of the Black list, it established under a new art.2 the definition of countries with Privileged Tax regimes and included Luxembourg there, but this time referred generally to Luxemburg holding companies (and not solely to the H29s).
Fortunately this doubt has been cleared by the elimination of Luxembourg from both art.1 & art.2 of the legal text as per the Declaratory Act RFB No. 3 of March 25th. 2011.
During a road show in October 2010 in Brazil, Finance Minister Luc Frieden claimed that Holding 29’s were extinguished and asked his Brazilian counterpart to remove Luxembourg from the IN 1037 list, as had happened for countries such as the Netherlands, Switzerland and Denmark. Why wasn’t there a level playing field?
It is difficult to say why the Brazilian Tax authorities responded on a different time scale and in a different manner to different European countries. The answer may be that with regard to the different countries that had filed a complaint, they did not have full information and/or understanding of the tax regime applying to holding structures ror the applicable regime of exchange of information concerning ownership structures (that they would expect to be in line with OCDE standards). Luxembourg waited 9 months for a reaction from the Brazilian Tax Authorities, the fact of the matter is that it has obtained the best possible response.
Interviewed by CW