Conversion of Executive Order No. 1,185/2023 approved in Brazil’s House of Representatives
Approved text upholds a system that recently introduced a new tax treatment for certain tax incentives, though it provides for other changes
On December 15, 2023, the Brazilian House of Representatives approved a bill to convert Executive Order (MP) No. 1,185/2023 into law, which would permanently introduce new tax rules for so-called ‘subvenções’ – a type of tax incentive granted to companies.
MP No. 1,185/23 determines that a series of federal taxes – Corporate Income Tax (IRPJ), Social Contribution Tax on Net Profit (CSLL), Social Integration Program Contribution Tax (PIS), and Social Security Contribution Tax (Cofins) – will apply to financial sums granted as subvenções.
As a compensatory measure, the new system permits tax credits to offset debts with the Brazilian Federal Revenue (RFB) or to be reimbursed in cash.
The version the House of Representatives ultimately approved differs from the one that was initially submitted. In procedural terms, it is more flexible regarding when companies may start using tax credits. The main changes are outlined below:
- According to the new text, companies will be automatically permitted to use their tax credits if the Brazilian Government fails to review their requests to do so within 30 days;
- The approved text also permits taxpayers dedicated to commerce to appropriate tax credits;
- Revenues obtained after companies file a request may be considered when calculating tax credits. This measure contrasts with the previous wording, which provided that only revenues obtained after the completion of the implementation or expansion of an economic venture could be included;
- The approved text also facilitates the effective use of tax credits – the original wording provided that reimbursement and offsetting would only be possible after submitting fiscal documents to register a tax credit and only in the calendar year following the recognition of revenues linked to the subvenções. Instead, tax credits may be used immediately after such revenues have been recognized. Moreover, if tax credits are not used for offsetting, reimbursement must occur in the 24th month following the company’s request (and not after the 48th month as the original wording provided);
- A greater range of revenues may be considered when calculating credits, including those related to expenses from leasing capital goods when implementing or expanding an economic venture;
- Companies have more time to appropriate their tax credits – a provision that limited the calculation of credits until December 2028 was removed. No specific time limit for the new tax regime has been set in the approved text.
The text the House of Representatives approved also clarifies when revenues linked to subvenções should be subject to taxation. As such, these revenues will not be included in IRPJ and CSLL estimates but will be subject to taxation in the annual adjustment.
A provision was added to the text that states the use of tax credits, as established by the provisional measure, does not prevent companies from enjoying other tax benefits linked to IRPJ, CSLL, PIS, and Cofins. This includes benefits related to the Manaus Free Trade Zone (ZFM) and the areas where the Superintendency for the Development of the Brazilian Northeast (Sudene) and the Superintendency for the Development of Amazonia (Sudam) operate.
Chapter V was also added to MP No. 1,185/2023 to regulate tax debts related to the previous tax regime for subvenções, which was primarily governed by Article 30 of Law No. 12,973/2014.
These provisions aim to encourage tax compliance and create a special form of tax transaction to resolve a significant, widespread legal controversy concerning debts enrolled (or not enrolled) in active debt, which stems from the non-payment of federal taxes contrary to the provisions of Article 30 of Law No. 12,973/2014.
Together with the abovementioned changes, the approved text has modified the legal framework for taxing interest on equity (JCP) – a mechanism for remunerating company partners/shareholders who invest their capital into it. The relevant provision is now more restrictive – for example, positive variations in net equity resulting from corporate acts between dependent parties (not involving the entry of assets into the company) may not be deducted.
Despite this restriction, it is worth noting that the provision is less stringent than the one initially conveyed in Bill No. 4,258/2023, which sought to prevent the deduction of equity interest altogether.
Furthermore, by repealing a legal provision that would prohibit subvenções from the calculation of operating profits, MP No. 1,185/2023 expanded the latter concept. With this change, revenues linked to subvenções now fall within the operating profit concept.
Provided the Senate approves the bill, and the Brazilian President assents to it, the new rules will take effect in January 2024.
It is important to note that subvenções will be taxed as of January 2024, including social contributions to PIS and Cofins. This measure is in line with a constitutional principle providing that the Brazilian Government can only levy new or adjusted taxes 90 days after the enactment of the corresponding legislation (as was stated in the executive order).
For further information, please contact Mattos Filho’s Tax practice area.