The bill that aims to tax dividends is confusing and allows for numerous exceptions.
The only clear-cut rule is that dividends paid abroad must be subject to a 10% dividend tax, regardless of tax treaties or any other considerations.
There is a provision for partial reimbursement of the dividend tax paid, after one year, if the company paying the dividends can prove that it has already paid the full nominal tax rate according to Brazilian rules (i.e., it has not utilized any tax benefits). However, this convoluted exemption offers little solace to financial planners. As things stand:
a) Investment vehicles based in countries that have a tax treaty with Brazil, or that maintain reciprocity with Brazil, such as the USA, should be able to offset the Brazilian dividend tax against the federal income tax due in their country;
b) Investment vehicles based in other countries—and especially in the various tax havens typically used as platforms for investments in Brazil, such as the British Virgin Islands and the Bahamas—will be taxed in full, with no compensation.
This means investments routed via the BVI and many other tax havens will face a net increase in taxation.
What are possible strategies to minimize this disgraceful tax, if it ever comes to pass?
a) Holding a minority equity share directly through a treaty country;
b) Funding the startup via loans;
c) Capitalizing profits into the Brazilian entity, with subsequent partial liquidation of the capital;
d) Expanding the startup’s operations to other countries from an early stage, so that profits can be routed to countries with lower overall taxation.
An additional tip: both Luxembourg and Dubai have tax treaties with Brazil. They may replace the BVI as springboards for investments in the country.
