INTERNATIONAL EXECUTIVE SERVICES. Brazil. Taxation of International Executives TAX

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1 INTERNATIONAL EXECUTIVE SERVICES Brazil Taxation of International Executives TAX

2 : Taxation of International Executives Overview and Introduction 3 Income Tax 4 Tax Returns and Compliance 4 Tax Rates 6 Residence Rules 7 Termination of Residence 8 Types of Taxable Compensation 9 Tax-Exempt Income 9 Expatriate Concessions 10 Salary Earned from Working Abroad 10 Taxation of Investment Income and Capital Gains 10 Additional Capital Gains Tax (CGT) Issues and Exceptions 12 General Deductions from Income 12 Tax Reimbursement Methods 14 Calculation of Estimates/Prepayments/Withholding 14 Relief for Foreign Taxes 15 General Tax Credits 15 Sample Tax Calculation 16 Special Considerations for Short-Term Assignments 18 Residency Rules 18 Payroll Considerations 18 Taxable Income 18 Additional Considerations 18 Other Taxes and Levies 19 Social Security Tax 19 Gift, Wealth, Estate, and/or Inheritance Tax 19 Real Estate Tax 20 Sales/VAT Tax 20 Unemployment Tax 20 Other Taxes 20

3 KPMG in Brazil 21 Taxation of International Executives 2

4 Overview and Introduction A foreign national is subject to Brazilian income tax on his/her worldwide income once he/she becomes a resident of Brazil for tax purposes. As a resident, his/her taxable income cannot be reduced by an allocation of income to days worked outside Brazil. In general, any remuneration received for services rendered by a resident foreign national constitutes taxable income. A foreign national that is a non-resident of Brazil for tax purposes is not subject to tax on remuneration paid outside Brazil. A non-resident is subject to a flat tax of 25 percent on remuneration paid in Brazil. An individual s tax liability is due on a monthly basis as income and gains are realized. The tax on salaried income paid by a Brazilian entity is withheld at the source. Thus, an individual who is paid on a Brazilian payroll from only one employer during the year would not have any tax due when the annual income tax return is filed, provided the taxes were withheld properly. However, the individual may be entitled to certain deductions, which may be claimed on the annual tax return, in which case he/she may be entitled to a tax refund when the annual return is filed. Income received abroad by a Brazilian tax resident must be reported and the corresponding tax paid by the last day of the month following the month the income was received. The monthly Carnê-Leão must be completed and the taxable base includes all remuneration and benefits paid abroad to a Brazilian tax resident and all other income (such as interest, dividends, and rental income). All income received abroad is subject to a monthly tax in accordance with the progressive tax rate table. The official currency of Brazil is the Brazilian Real (BRL). For information on practical matters that employers and employees should consider with respect to an international assignment, please refer to the companion publication titled Planning Your International Transfer, if available. For the purposes of this publication, the host country refers to the country where the expatriate is going on assignment. The home country refers to the country where the expatriate lives when he/she is not on assignment. Taxation of International Executives 3

5 Income Tax 1 Tax Returns and Compliance When are tax returns due? That is, what is the tax return due date? 30 April. What is the tax year-end? 31 December. What are the compliance requirements for tax returns in Brazil? The taxpayer is required to file his/her tax return by the 30 April of the year following the end of the taxable year. There is no provision for an individual to obtain an extension of time for filing the return. Late filed returns are subject to penalty and interest. Any balance due with the annual tax return must be paid on 30 April. However, the taxpayer is given the option to pay the balance in six monthly installments, subject to interest charges, beginning on the final filing date. Residents The following are considered as resident taxpayers. Naturalized foreigners. Foreigners, holders of permanent visa (since they arrive in Brazil). Foreigners, holders of temporary visa with a local employment contract, arriving in Brazil, since the date of arrival. Foreigners, holders of temporary visa without a local employment contract, arriving in Brazil after completing 183 days of stay in Brazil, counted within any 12-month period. Resident taxpayers are subject to pay income tax in Brazil on their worldwide (global) income, on a monthly cash basis. 1 All income tax information is summarized by 2009 KPMG Tax Advisors-Assessores Tributários S/C Ltda., the Brazilian member firm of KPMG International, based on the Brazilian Regulamento do Imposto de Renda. Taxation of International Executives 4

6 Resident taxpayers are subject to withholding tax system on their Brazilian-sourced income based on a progressive tax table. They are also subject to the Brazilian monthly income tax on the sum of their offshore income (wages, compensation, interests, dividends, rental income, capital gains, and so on) and to file annual Brazilian income tax returns. Resident taxpayers are required to pay monthly income tax (a process called Carnê- Leão) on their income that was not subject to withholding tax by other local source. Generally, it means offshore income and rental income received from other individuals. This tax is also calculated based on a progressive tax table that has three rates: 0 percent, 15 percent, and 27.5 percent. The payment has to be effected up to the last business day of the following month. Central Bank Report Resolution 2911 of 29 November 2001 requires all tax residents of Brazil owning assets abroad to inform the Brazilian Central Bank of these holdings provided the total fair market value exceeds USD 100,000. The Central Bank Report must include all assets held outside of Brazil as of 31 December and be filed annually. The report must be filed by 31 July of the following year. The resolution states that a maximum penalty of BRL 250,000 may be imposed in cases where assets are not reported. Non-Residents The following are considered as non-resident taxpayers: foreigners, holders of temporary visa without an employment contract with a local company, arriving in Brazil, before completing 183 days of stay in Brazil, counted within any 12-month period. During this period of time (183 days), when the taxpayer is considered as nonresident, Brazilian-sourced income, if any, is subject to withholding tax system at the flat rate of 25 percent (no deductions are allowed), exclusively at the source. Offshore income is tax-exempt. Taxpayers in this condition are considered exempt and are not required to complete and file a Brazilian annual tax return. Taxation of International Executives 5

7 The 25 percent withholding income tax payment is to be effected by the local payer of the income, through a voucher (Darf) with the code Income Tax on nonresident s income. Yearly, the company must provide a Brazilian wage statement to foreigners, which will be included on the tax clearance process, when they are leaving the country. The social security and labor rights applicable to non-resident foreigners respect the same treatment of Brazilian employees, when they have an employment contract with a local company. Tax Rates What are the current income tax rates for residents and non-residents in Brazil? Residents Resident individuals are taxed according to the following progressive tax table. Monthly Income tax table for 2009 Total tax on income below bracket Taxable income bracket Tax rate on income in bracket From To BRL BRL BRL Percent , , , , , , , , Over Non-Residents The 25 percent withholding income tax payment is to be effected by the local payer of the income. Offshore income is tax-exempt. Taxation of International Executives 6

8 Residence Rules For the purposes of taxation, how is an individual defined as a resident of the United States? Foreigners are taxed in Brazil according to their visa (work permit) category. In this regard, please note that foreign holders of a Business Visa (which is not a work permit) are not allowed to work in Brazil, but only to have meetings, participate in seminars, meet customers and suppliers, prospect the local market, and so on but not to perform any remunerated activities. So, the only appropriate visa categories that are allowed to work in Brazil on a regular basis are: permanent visa; temporary visa (2-year visa) with an employment contract with a local company; and temporary visa (2-year visa) without an employment contract with a local company, under the umbrella of a Technical Assistance Agreement existing between a Brazilian company and a foreign company. The following individuals are considered to be residents for Brazilian tax purposes. Brazilian citizens living in Brazil. Brazilian residents living abroad for the first 12 months subsequent to their departure, in cases where no tax clearance certificate was filed. Naturalized foreign nationals. Foreign national holders of permanent visas and holders of temporary work visas under an employment contract with a Brazilian entity as of the date of entry to Brazil with such visa. Holders of temporary visas without an employment contract with a Brazilian entity after completing 183 days of actual physical presence in Brazil within any 12-month period. Taxation of International Executives 7

9 A foreign national who enters Brazil with a permanent visa is considered to be a resident for tax purposes from the day of arrival and therefore, is subject to tax on his/her worldwide income. The holder of a temporary work visa is also considered to be a resident for tax purposes from the day of arrival if he/she has an employment relationship with a Brazilian entity. If there is no employment relationship with a Brazilian entity, the holder of a temporary work visa will be considered a resident for tax purposes after the 183 day of physical presence in Brazil within a 12-month period, beginning on the date of arrival or on obtaining a permanent visa, if this preceeds the 183 days of physical presence. What if the assignee enters the country before their assignment begins? Termination of Residence Are there any tax compliance requirements when leaving Brazil? Upon leaving Brazil, taxpayers must break tax residency. In order to break tax residency in Brazil an individual must obtain a tax clearance. The tax clearance process involves the preparation and filing of a final tax return covering the period from 1 January to the date of departure. Any returns or balances outstanding from prior years must also be filed and paid. As a result of a failure to file in the tax clearance process, the individual will be regarded as a resident for income tax purposes during the first 12 months of absence and continue to be taxed on worldwide income. Individuals eligible for filing the annual exempt Brazilian tax return include: holders of a CPF card, whether resident in Brazil or not, that were not required to file an annual income tax return in Brazil; any individual that has income of less than BRL 17, This includes employment income as well as retirement plan distributions, pension income, and income from rental property; an individual listed as a dependent in the annual income tax return of another taxpayer and holder of a CPF number; Taxation of International Executives 8

10 a Brazilian citizen that lives outside Brazil that has filed a tax clearance process upon departure but wants to keep their CPF number in active status; and an individual that lives abroad (Brazilian or foreign) that holds assets in Brazil or simply wants to keep the CPF regular and active. Types of Taxable Compensation What categories are subject to income tax in general situations? The following compensation components are taxable. Base salary, including salary paid outside Brazil. Cost-of-living allowance. Housing allowance. Free or below-market-value use of accommodations. The subsidized portion of rental costs is considered to be the taxable benefit. Reimbursement of home- or host-country taxes. Education allowance. Home leave. Auto allowance. Personal use of an automobile provided primarily for business use. Interest on below-market-rate loans. Company provided security guards or drivers. Tax-Exempt Income Taxation of International Executives 9

11 Expatriate Concessions Are there any concessions made for expatriates in Brazil? There are no special tax concessions granted to expatriates. Salary Earned from Working Abroad Is salary earned from working abroad taxed in Brazil? If so, how? A resident is taxed on remuneration paid outside Brazil whereas a non-resident is not subject to tax on remuneration paid to him/her outside Brazil. Taxation of Investment Income and Capital Gains Are investment income and capital gains taxed in Brazil? If so, how? Investment income from sources outside Brazil is subject to tax at ordinary rates and the tax is required to be paid by the last day of the month following the month of receipt of the income. This income is included in the monthly Carnê-Leão and the corresponding taxes paid. No tax is withheld or due on the distribution of dividends by Brazilian companies. Brazilian interest income is generally taxed and withheld at the source. However, interest earned on Brazilian savings accounts is not subject to tax. Dividends, Interest, Rental Income, and Capital Gains Rental income is subject to tax. The taxpayer may deduct from gross rental income the taxes paid on the rental property, rent paid on property being subleased, and maintenance and collection expenses. Real estate capital gains are taxable at a 15 percent rate. For tax residents in Brazil, the amount of the gain is reduced by 5 percent for each year the property was held prior to Provided a similar transaction has not occurred within the previous five years, an individual who sells his/her personal residence for a sale price not over BRL 440,000 and who owns no other real estate, is exempt from tax on the gain. Taxation of International Executives 10

12 Income tax exemptions for individuals are granted for certain capital gains arising from the sale of residential real estate. To receive the exemption, an individual must use the amount received in the transaction to acquire additional residential real estate. The new real estate property would have to be bought within a 6-month period after the first real estate property was sold. The benefit could only be granted once during a 5-year period (Law Article 38). Gains from Stock Option Exercises Capital gains on the sale of stock sold on a Brazilian stock exchange are exempt from tax if the proceeds from the sale are less than BRL 20,000. If the proceeds from the sale exceed this amount, the capital gain is subject to a flat 15 percent tax rate. Capital losses from the sale of stock sold on a Brazilian stock exchange may be used to offset capital gains on a monthly basis. Any unused losses may be carried forward to future months and future years. Capital gains from stock not sold on a Brazilian stock exchange are subject to a flat tax rate of 15 percent if the proceeds from the sale exceed BRL 35,000. Capital losses from such sales may not be used to offset capital gains. The corresponding tax on all capital gains must be paid by the last day of the month following the month of the sale. However, non-residents that realize capital gains in Brazil must pay the tax on the date of the sale. Capital gains on the sale of all other personal property either held inside or outside of Brazil, are subject to a flat tax rate of 15 percent if the proceeds from the sale exceed BRL 35,000. Gain from the sale of stock or personal property outside of Brazil that was acquired prior to becoming a resident of Brazil is not taxable. Foreign Exchange Gains and Losses Principal Residence Gains and Losses Taxation of International Executives 11

13 Capital Losses Personal Use Items Gifts Additional Capital Gains Tax (CGT) Issues and Exceptions Are there additional capital gains tax (CGT) issues in Brazil? If so, please discuss? Pre-CGT Assets Deemed Disposal and Acquisition General Deductions from Income What are the general deductions from income allowed in Brazil? Resident taxpayers are entitled to claim dependents as a deduction. Per Brazilian tax legislation, the following are considered dependents. Children or stepchildren up to 21 years of age, or any age if physically or mentally unable to work. Children or stepchildren between 21 and 24 years of age that are studying at a university or technical school. A spouse. A companion with whom the taxpayer has lived for more than five years or with whom the taxpayer has a child. Taxation of International Executives 12

14 A minor (up to 21 years of age) for whom the taxpayer is the legal guardian and whom the taxpayer sustains economically. A sibling, grandchild, or great grandchild up to 21 years of age or any age when physically or mentally unable to work, provided the individual is not sustained by his/her parents, the taxpayer is the legal guardian and whom the taxpayer sustains economically. The dependent needs to hold a CPF Number to be considered dependent as a deduction as of 18 years old. Parents, grandparents, or great grandparents, whose annual income, taxable or not, does not exceed BRL 17, and who are sustained economically by the taxpayer. A father- or mother-in-law, who s annual income, taxable or not, does not exceed BRL 17, These individuals can only be claimed as dependents if the taxpayer s spouse has a filing requirement in Brazil (that is, the spouse has income greater than BRL 17,215.08) and files a separate income tax return or jointly with the taxpayer. The deduction will be taken by the spouse if a separate return is filed or by the taxpayer if a joint return is filed. A totally incapacitated individual for whom the taxpayer is the legal guardian or court-appointed administrator. Note: Even if the dependents do not live in Brazil, the taxpayer is entitled to claim a deduction for them as dependents on the Brazilian individual income tax return. Payments of alimony and child support by the taxpayer pursuant to a Brazilian court decision are deductible for tax purposes by the taxpayer and must be included in taxable income by the recipient. Employee contributions to the Brazilian social security system, which are withheld from salary and wages by the employer on a monthly basis, are deductible in determining the monthly tax assessment and on the annual tax return. Taxation of International Executives 13

15 Amounts paid by the taxpayer to Brazilian domiciled private pension plans are deductible for purposes of the monthly tax calculation and on the annual income tax return, limited to 12 percent of gross income. Un-reimbursed medical expenses incurred by the taxpayer on his/her own behalf or in respect of treatment received by a dependent are deductible on the annual income tax return. Pension income from Brazilian government plans received by individuals 65 years of age or older is not taxable up to a prescribed limit. The current limit is BRL 1, per month. Education expenses for the taxpayer or his/her dependents are deductible up to a prescribed amount. Currently the annual limit is BRL 2, per student. Tax Reimbursement Methods What are the tax reimbursement methods generally used by employers in Brazil? No information available. Calculation of Estimates/Prepayments/Withholding How are estimates/prepayments/withholding of tax handled in Brazil? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on. Pay-As-You-Go (PAYG) Withholding PAYG Installments When are estimates/prepayments/withholding of tax due in Brazil? For example, monthly, annually, both, and so on. Taxation of International Executives 14

16 Relief for Foreign Taxes Is there any Relief for Foreign Taxes in Brazil? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on? A foreign tax credit mechanism exists in Brazil whereby taxpayers may receive a unilateral credit against Brazilian income tax for foreign taxes paid on non-braziliansourced income. The foreign tax credit is allowed for taxes levied in countries with which Brazil has an income tax treaty in effect or for taxes levied by countries whose legislation grants reciprocal treatment to Brazilian-source income and taxes. The foreign tax credit may not exceed the difference between the Brazilian income tax calculated without the foreign income and the Brazilian income tax calculated on a taxable base that includes foreign income. Brazil currently has tax treaties with 25 countries for the purpose of reducing or eliminating double taxation. General Tax Credits What are the general tax credits that may be claimed in Brazil? Please list below. Not applicable. Taxation of International Executives 15

17 Sample Tax Calculation 2 This calculation assumes a married taxpayer resident in Brazil with two children whose 2-year assignment begins 1 January 2009 and ends 31 December The taxpayer s base salary is USD 100,000 and the calculation covers three years USD USD Salary 100, ,000 Bonus 20,000 20,000 Cost-of-living allowance 10,000 10,000 Housing allowance 12,000 12,000 Company car 6,000 6,000 Moving expense 20,000 0 reimbursement Home leave 0 5,000 Education allowance 3,000 3,000 Interest income from nonlocal sources 6,000 6,000 Exchange rate used for calculation: USD 1.00 = BRL Other Assumptions All earned income is attributable to local sources. Bonuses are paid at the end of each tax year, and accrue evenly throughout the year. Interest income is not remitted to Brazil. The company car is used for business and private purposes and originally cost USD 50,000. The employee is deemed resident throughout the assignment. Tax treaties and totalization agreements are ignored for the purpose of this calculation. 2 Sample calculation generated by KPMG Tax Advisors-Assessores Tributários S/C Ltda., the Brazilian member firm of KPMG International, based on the Brazilian Regulamento do Imposto de Renda. Taxation of International Executives 16

18 Calculation of Taxable Income Year-ended Days in Brazil during year BRL BRL Earned income subject to income tax Salary 230, ,000 Bonus 46,000 46,000 Cost-of-living allowance 23,000 23,000 Net housing allowance 27,600 27,600 Company car 13,800 13,800 Moving expense reimbursement 0 0 Home leave 0 11,500 Education allowance 6,900 6,900 Total earned income 347, ,800 Other income 13,800 13,800 Total income 361, ,600 Deductions 0 0 Total taxable income 361, ,600 Calculation of Tax Liability 2009 BRL 2010 BRL Taxable income as above 361, ,600 Brazilian tax thereon 87,842 90,489 (Standard Deduction) Less: Domestic tax rebates (dependent spouse rebate) Foreign tax credits Total Brazilian tax 87,842 90,489 Taxation of International Executives 17

19 Special Considerations for Short-Term Assignments 3 Residency Rules Are there special residency considerations for short-term assignments? Payroll Considerations Are there special payroll considerations for short-term assignments? Taxable Income What income will be taxed during short-term assignments? Additional Considerations Are there any additional considerations that should be considered before initiating a short-term assignment in Brazil? 3 For the purposes of this publication, a short-term assignment is defined as an assignment that lasts for less than one year. Taxation of International Executives 18

20 Other Taxes and Levies Social Security Tax 4 Are there social security/social insurance taxes in Brazil? If so, what are the rates for employers and employees? Any employee on a Brazilian payroll is subject to social security contributions. The rates vary depending on the individual s salary level. Social security tax is withheld at rates between 7.65 percent and 11 percent of monthly gross salary up to a prescribed maximum amount (which is currently BRL ). The employer s contribution is determined at the rate of approximately 36.3 percent of the gross salary with no limitation on the amount of earnings subject to contributions. This includes an 8.5 percent contribution of the employer to the Brazilian severance fund (FGTS). Employer and Employee Type of Insurance Employer Percent Paid by Employee Percent Total Percent Social Security With Cap Varies Severance Indemnity 8.5 None 8.5 Gift, Wealth, Estate, and/or Inheritance Tax Are there any gift, wealth, estate, and/or inheritance taxes in Brazil? Wealth Taxes A net worth statement does presently form part of the individual income tax return, although no tax is assessed. Inheritance and Gift Taxes According to decree No , issued 1 April 2002, a 4 percent (ITCMD) inheritance and gift tax was implemented for the state of São Paulo. This rate may 4 Regulamento do Plano de Custeio da Previdência Social Taxation of International Executives 19

21 differ in other states within Brazil. Under certain circumstances a portion of the inheritance or gift may be exempt from tax. Real Estate Tax Are there real estate taxes in Brazil? Individuals owning real state in Brazil are subject to real state taxes (IPTU). This is a municipal tax calculated on value of each property as assessed by the authorities. Usually the tax is calculated taking into account the location and size of the property that can be land, house, apartments, business offices, and so on. Sales/VAT Tax Are there sales and/or value-added taxes in Brazil? There are no sales or VAT taxes in Brazil. Unemployment Tax Are there unemployment taxes in Brazil? There is no unemployment tax in Brazil. Other Taxes Are there additional taxes in Brazil that may be relevant to the general assignee? For example, customs tax, excise tax, stamp tax, and so on. Local Taxes 5 A municipal building tax, normally passed on to tenants, is the only direct local tax. 5 Regulamento do Imposto Predial e Territorial Urbano Taxation of International Executives 20

22 KPMG in Brazil São Paulo Patricia Hervelha Quintas KPMG Tax Advisors-Assessores Tributários S/C Ltda. Av. Nove de Julho, th floor São Paulo Brazil Tel Fax Taxation of International Executives 21

23 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation KPMG Tax Advisors-Assessores Tributarios S/C Ltda., a Brazilian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.