1 – Scope of Law n.º 14,789/2023
- Law n.º 14,789/2023 revoked, as of January 1st, 2024, the existing legal provisions relating to (i) the exclusion of investment subsidies from the IRPJ and CSLL (corporate income taxes) basis, and (ii) the non-levy of PIS/COFINS (turnover contributions) on these subsidies
- The Law instituted a new “Tax Credit” associated with investment subsidies granted by the Federal Government, States, Federal District and Municipalities. The credit will be calculated by applying the IRPJ rate of 25% on the subsidies revenue and may be reimbursed by the Federal Government or offset with federal taxes. Also, the Tax Credit must be assessed through the Tax Accounting Bookkeeping ancillary obligation (ECF – income tax return) for the fiscal year in which the subsidies revenue is recognized.
- The Law also encompasses changes regarding the calculation of interest on net-equity (JCP) and the taxation of individuals and investment funds, as well as introduced a presumed PIS/COFINS credit for road transportation services.
2 – Taxation of investment subsidies
- Investment Subsidy Legal Concept: Similar to the current legislation, Law n.º 14,789/2023 defines investment subsidies as incentives granted for the implementation or expansion of economic ventures, but presents specific and restrictive concepts for the terms “implementation” and “expansion”. For instance, the concept of “implementation” assumes that the subsidized legal entity is not previously domiciled in the geographic location of the federal entity responsible for granting the subsidy.
- Tax Credit – RequirementsThe Tax Credit will be conditioned to prior qualification of the legal entity’s incentive within the Brazilian IRS. The tax authorities will have 30 days to analyse the qualification request. If the analysis is not completed within this period, the incentive will be considered approved.
The qualification will only be possible if the investment subsidy granting act: (i) precedes the date of implementation or expansion of the economic enterprise; and (ii) expressly establishes the conditions and counterparts to be observed by the legal entity in relation to the implementation or expansion of the economic enterprise.
When calculating the tax credit, it can only be considered the subsidy revenue (i) related to depreciation/amortization/exhaustion or leasing/rental of capital goods associated with the implementation or expansion of the economic enterprise; and (ii) computed in the corporate income taxes basis. In this regard, it is important to note that:
- The Law 14,789/2023 does not establish any specific definition for depreciation, amortization and exhaustion, and therefore, as a rule, the amounts recognized by the taxpayer’s in its accounting books should be considered; and
- The nexus established by the Law with depreciation, amortization and exhaustion expenses could in practice lead to restrictions on the credit calculation on subsidies associated with activities that do not necessarily depend on expenses of this nature (e.g. services provision).
- Other relevant aspects
- As a rule, the Tax Credit can be recognized even if the legal entity has recorded taxes losses in the calendar year in which the subsidy revenue was accounted.
- The Tax Credit is not restricted to the account recognition of a tax incentive reserve and the non-distribution of subsidized revenues to shareholders.
- In principle, the effects of Law n.º 14,789/2023 do not affect tax incentives which, according to the Superior Court of Justice case law, cannot be taxed by the Federal Government, considering the federative principle provided for by the Federal Constitution.
- The Law n.º 14,789/2023 does not set any limitation on determining the Tax Credit in terms of the subsidy nature, which in theory includes any kind of incentive (e.g. presumed credit, exemption, tax basis reduction, deferral, etc.).
- Investment subsidies revenue will not be included in the monthly estimate calculation basis for corporate income taxes purposes.
- Special tax transaction and self-regularizationTax credits that were assessed in disagreement with art. 30 of Law n.º 12,973/2014 – legislation that provided for the non-taxation of investment subsidies – may be included in a special tax transaction to be proposed by the Minister of Finance. Tax debts that have not been subject to a tax assessment may also be the paid under a specific self-regularization.
Payment of the transacted/self-regularized amounts can be made in cash in up to 12 successive monthly instalments, with a reduction of 80% of the consolidated debt. If the taxpayer chooses to pay in more instalments, at least 5% of the consolidated debt must be paid in cash and the remaining amount can be paid (i) in up to 60 successive monthly instalments, with a 50% reduction or (ii) in up to 84 successive monthly instalments, with a 35% reduction.
3 – Changes to the calculation basis of JCP
As of January 1st, 2024, for determining the calculation basis of JCP:
- Only the effective paid-in share capital may be considered;
- Only capital reserves related to the issuance of shares may be taken into account;
- Tax incentive reserves, usually associated with investment subsidies, will no longer be included in the JCP basis;
- Cannot be taken into account positive changes in equity resulting from corporate acts between dependent parties that do not involve the effective entry of assets, with a definitive equity increase; and
- Should be considered, except in the situation described above (corporate acts between dependent parties):
- reducing equity accounting entries made to accounts not considered in the JCP basis, if it results from events that gave rise to positive equity entries made to accounts considered in the JCP basis (share capital, profit or capital reserves, treasury shares and accumulated earnings or losses); and
- negative amounts recorded in the equity valuation adjustment account arising from corporate acts between dependent parties.
4 – PIS/COFINS – presumed credit for road transportation services: Between January 1st, 2024 and December 31st, 2026, it will be possible to discount presumed PIS/COFINS credit arising from the provision of intercity, except metropolitan, and interstate road passenger transport services.
5 – Taxation of individuals: The Law gives the option for individuals to tax, on December 31st of each year at the rate of 15%, the profits earned by foreign subsidiaries, even if these entities are not (i) located in a tax haven, (ii) beneficiaries of a privileged tax regime or (iii) have active income of less than 60% of total income.
6 – Investments in funds
- The gain or loss controlled in a sub-account arising from the valuation, at equity value or fair value, of equity investments, will be included in the income withholding tax (IRRF) calculation basis when the investment is sold by the fund, or when the income is distributed to quotaholders.
- The amounts received by the Equity Fund (FIP) from its investee companies will not be computed on the IRRF calculation basis, provided that the Fund reinvests these amounts.
- Investment funds that invest at least 95% of its equity in the terms prescribed by law are not subject to the IRRF under the six-monthly tax regime. In this case, Law 14,789/2023 clarifies that if this limit is not met, the six-monthly IRRF will be due.