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CARF asserts that international treaties for the avoidance of double taxation do not impede taxation on the revenues of Brazilian companies resulting from profits accrued in foreign subsidiary

In three proceedings concerning the taxation of profits accrued to foreign subsidiaries of Brazilian entities, the Superior Chamber of the Administrative Panel of Tax Appeals (CARF) has decided that the treaty for the avoidance of double taxation between Brazil and The Netherlands does not preclude the taxation of the Brazilian entity, in accordance with domestic law.

The prevailing understanding, formed by majority of votes due the quality vote cast, was that the “revenues” obtained by the Brazilian entity would be taxed, and not the profits of its foreign subsidiary (thus avoiding the application of the treaty).

In summary, the taxpayer has discussed the applicability, to the case at stake, of arts. 25 of Law 9,249/1995 and 74 of Provisional Measure 2,158-35/2001, which set forth that the profits accrued by controlled or affiliated company abroad are deemed made available to the controller of affiliated in Brazil on the date of the balance sheet they have been assessed.

The argument presented by the taxpayer was accepted by the reporting member, who was followed by other members that agreed that the treaty Brazil-Netherlands, due to its art. 7, would prevent the imposition of taxes based on domestic law, as the authority to tax profits is exclusive to the country of domicile (in the case, The Netherlands).

However, due to the quality vote cast by the Chairman, the prevailing understanding was that the taxed amount does not correspond to the profits accrued by the controlled entity abroad, but the “revenue” of the Brazilian entity, in proportion to its participation in the foreign controlled entity, even if there is no actual availability and remittance of funds. Thus, the imposition would not be in violation of art. 7 of said international treaty.

The taxation of profits accrued abroad continues to be a widely debated matter within the administrative and judicial instances, even after the judgment of the direct unconstitutionality lawsuit 2,588 and of extraordinary appeals 611,568 and 541,090 by the Supreme Court.

Even with the view of the tax authority having prevailed in the highest judgment body within the administrative instance, already with a new formation, one may not yet foresee the conclusion of discussions on the matter in the near future.

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July 26, 2016