Provisional Measure No. 1,185/2023 – Investment Subsidies Taxation


Scope of the Provisional Measure No. 1,185 (“MP 1,185”)

  • The MP 1,185, published on August 30, 2023, revoked, as of January 1, 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 and COFINS (turnover contributions) on these subsidies. In other words, as of 2024, investment subsidies will be taxable.
  • In addition, MP 1185 instituted a new “Tax Credit” associated with investment subsidies granted by the Federal Government, States, Federal District, and Municipalities. The credit should be calculated by applying the IRPJ rate on the subsidies revenue and may be reimbursed by the Federal Government or offset with federal taxes.

Investment Subsidy Legal Concept

  • Similar to the current legislation, MP 1,185 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.

Investment Subsidy Tax Credit: Requirements

  • Qualification Procedure: The Tax Credit will be subject to the legal entity’s prior qualification within the RFB. It is estimated that the tax authorities will issue an administrative act regulating the qualification procedure.

It is important to emphasize that qualification will only be possible if the 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.

  • Limitations: The estimate and use of the Tax Credit is subject to a number of additional conditions, among which the following should be highlighted:
    • The credit should only be calculated on subsidies revenues recognized after the implementation or expansion of the economic enterprise is completed.
    • When calculating the credit, no subsidy revenue can be considered if not related to the depreciation, amortization, or exhaustion expenses associated with the implementation or expansion of the economic enterprise. Furthermore, the portion of the subsidy revenue that exceeds the value of the aforementioned depreciation, amortization, or exhaustion expenses may not be taken into account in the Tax Credit

In this regard, it is worth mentioning that:

      • The MP 1,185 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 MP 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 (g. services provision).
    • The credit is limited to subsidy revenues recorded until December 31, 2028.

Other aspects

  • As a rule, the Tax Credit could be registered even if the legal entity has recorded taxes losses in the calendar year in which the subsidy revenue was accounted.
  • MP 1,185 assumes that the recognition of subsidy revenue must be carried out in accordance with the “applicable accounting standard”.
  • 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 the Provisional Measure 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.
  • MP 1185 does not set any limitation on determining the Tax Credit in terms of the subsidy nature, which in theory includes any kind of incentive (g. presumed credit, exemption, tax basis reduction, deferral, etc.).
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