10 September 2014
The Brazilian Internal Revenue Service (IRS), through Resolution of Divergence No. 8/2014, has recently reformed and unified its understanding regarding the taxation of services provided abroad by Brazilian legal entities under the Deemed Profit regime, which determines the taxable income based on fixed rates applicable to the gross revenue. According to such Resolution, the legal entity that provides services abroad cannot offset the income tax paid in the contracting country in order to reduce the income tax due in Brazil, unless an agreement to avoid double taxation had been signed between Brazil and the country abroad and depending on the terms of the agreement.
This Resolution reformed the decision issued trough Formal Consultation No.159/2013, which allowed the companies under the Deemed Profit regime to deduct, from the income tax calculated in Brazil, the tax levied abroad on the revenues related to the supply of services.
Notwithstanding Brazilian IRS’s understanding, we understand that there are good grounds to defend the offset of the income tax paid abroad even in the cases in which no agreement to avoid the double taxation had been signed.
We remain at your entire disposal to provide any clarification that might be required.