WHT on interest in absorption of accumulated losses by means of a debit to payables to shareholder
In Ruling 210 of the General Tax Coordination (“COSIT”), published on July 1st, the Brazilian tax authorities understood that the Withholding Income Tax (“WHT”) is due on interest not yet due when the loan and corresponding interest granted by the foreign shareholder are used to absorb the accumulated accounting losses of a Brazilian company.
Although the tax legislation allows for the absorption of accumulated accounting losses by means of a debit to an account payable to the shareholder, such transaction is not regulated by the civil/corporate legislation.
In what refers to the WHT, tax rules establish that amounts paid, credited, delivered, used or remitted to beneficiaries domiciled abroad are subject to WHT at a general rate of 15%.
Based on this rule, COSIT understood, in this case, that the absorption of accumulated accounting losses by means of a debit to a loan payable to the shareholder corresponds to the “use” of the interest not yet due and, thus, WHT would be due, even if such transaction does not result on the acceleration of the maturity of such interest.
COSIT also based its position on Normative Opinion 4/81 and on Appellate Decision of the Administrative Court of Tax Appeals 1101-00-766 of 5/7/12, that considered that the absorption of accumulated accounting losses by means of a debit of payables to the shareholder was similar to a capital increase followed by a capital reduction, to conclude that the use of interest to reduce the accumulated accounting losses of the Brazilian company benefits the shareholder by means of the increase of the subsidiary’s share capital.
COSIT’s position is subject to criticism as, in the absorption of the accumulated accounting losses against the payable to the shareholder, the shareholder does not receive any compensation upon the liquidation of the liability (differently from the capital increase) and no income subject to taxation is generated. On the other hand, the terms related to payment, credit, delivery, use or remittance used by the legislation for WHT purposes assume that the foreign taxpayer benefits from the transaction, which does not happen in the absorption of the accumulated accounting losses.
In addition, COSIT’s position differs from the administrative case law that states that WHT is considered due on the maturity date of the liability.
Finally, it should be noted that rulings issued by COSIT have a binding effect within the Brazilian Federal Revenue Service (“RFB”) i.e., this position must be observed by all RFB units (including tax auditors) and applied to all taxpayers in the same situation.
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