By Tax Area

The First Panel of CARF, when judging case 16561.720063/201474, understood that profits earned by companies controlled abroad in countries with a double taxation treaty with Brazil shall be taxed only in the country of domicile.

This position further coincides with Law 12.973/14, currently in force, which included § 7 to Art. 25 of Law No. 9.249/95, to point out that profits earned abroad by subsidiaries and affiliates shall be calculated in accordance with the rules of the commercial legislation of the country of domicile.

In the present case, the taxpayer did not include the profits of its subsidiaries, in Spain and Luxembourg, in the calculation basis of IRPJ and CSLL. Dissatisfied, the inspection understood that the collection should have occurred, based on Art. 74 of MP 2158-35/01 and Art. 25 of Law 9.249/95.

This scenario illustrates the discussion that prevailed for years about the compatibility of Art. 74 of MP 2158-35/01 with international treaties aimed at avoiding double taxation. According to the Federal Tax Authorities, the taxation of profits would not violate the treaties, as it would not be the profit of the foreign company itself that would be taxed, but the accounting reflection of the positive result in the equity of the Brazilian investor.

However, CARF's understanding has undergone relevant changes. When judging the process in question, the counselor rapporteur, considering that both Spain and Luxembourg have double taxation treaties with Brazil, defended that Art. 7 of the OECD Model Conventions present in both treaties blocks the taxation of profits in Brazil, as it provides that “the profits of an enterprise of a Contracting State shall be taxable only in that State”. That said, the rule is expressed by providing that taxation is the exclusive competence of the company's country of domicile.

Now, the central point in the defense of taxpayers and which predominated in the CARF is that if the countries involved in the demands have a double taxation treaty with Brazil, Art. 7 of the OECD Model Conventions shall therefore be observed. The result of this judgment was applied to case 16561.720135/2015-64, on the same subject matter.

Moreover, the materialities provided for in Art. 74 of MP No. 2158-35/01 and in the double taxation conventions were thus evidenced. Thus, the profits taxed in Brazil are those earned by the Brazilian investor to the extent of their interest in the investment located abroad, at the end of each calendar year.

Finally, it is reiterated that this is an important controversy that impacts Brazilian multinationals, since the new understanding of CARF reflects on Brazilian taxation and is favorable to the taxpayer.