Tax Havens Pay a Hefty Price in Brazil

Taxes. Nobody likes them, but everyone has to pay them. Or do they?

Tax planning involves reducing the financial burden on a transaction by creating a more tax efficient corporate structure. Often it includes using tax havens - offshore jurisdictions that charge little or no income tax. The 2016 release of the Panama Papers brought to light the extent of their use worldwide.

But if you’re doing business in Brazil, you might want to reconsider using a tax haven in your corporate structure. While their use isn’t prohibited, they could end up costing you more in the end.

According to IN 1037/2010, a jurisdiction is characterized by Brazil as a tax haven if the government doesn’t collect income tax or charges an income tax rate less than 20%. Brazil also considers a location as a tax haven if the laws prevent access to information about the company’s corporate ownership.

Currently, Brazil’s list of tax havens contains 61 jurisdictions including Belize, the British Virgin Islands, the Cayman Islands, the Bahamas, Curaçao, Ireland, and Panama. While some US territories are included, no US state is on the list.

Using a tax haven as part of a transaction in Brazil will increase your tax burden. Generally, the withholding tax on capital gains is 15%. If the buyer’s located in a tax haven, the withholding rate increases to 25%.

It’s just one more reason why corporate and tax planning is so important in international business transactions. You might think you’re saving money, but in fact you could end up paying even more.