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Brazil – Cost Sharing with Company Domiciled Abroad

1. Characterisation of shared services as reimbursement

The payment of costs and expenses shared between companies of the same economic group, with headquarters in different countries, may be treated as a mere reimbursement without the incidence of a high tax burden on payment or receipt. However, in order for such costs and expenses to be characterised in Brazil as a reimbursement, certain requirements must be complied with.

First of all, to be treated as a reimbursement the costs and expenses must relate to supporting activities rather than core activities of the service provider. Thus, services that are included in the corporate purpose of the service provider may not be shared, and consequently the costs and expenses thereof cannot be treated as a reimbursement.

For this reason, it is only possible to recognise as a reimbursement of shared costs and expenses those actually incurred by the service provider. It is therefore not permitted to add any amount or profit margin to the costs or expenses shared and reimbursed.

Moreover, in order for the costs and expenses to be recognised as a reimbursement, it must be shown unequivocally that the services shared are of mutual benefit to the companies that participate in the agreement. Accordingly, all the companies must benefit from the services shared, including those performing the services.

With a view to proving compliance with the minimum conditions required, it is necessary to have, apart from other documents, a formal contract between the companies of the group, showing the total costs of each service incurred and shared, and also the reasonable and objective criteria used for the division.

The minimum requirements of the said contract were set out in Cosit Answer to Consultation no. 8/12 of which, in spite of its technicality, it is worth citing the following:

  • a) the division of the costs and risks inherent to the development, production or obtaining of goods, services or rights must be detailed;
  • b) the contribution of each company must be consistent with the individual benefits expected or actually received;
  • c) the identification of the specific benefit to each company of the group must be clear;
  • d) there must be an agreement for reimbursement, meaning the refund of costs relating to the effort or sacrifice incurred in the carrying out of an activity, without any additional profit;
  • e) the collective nature of the advantage offered to all the companies of the group must be express;
  • f) there must be a provision for remuneration of the activities, irrespective of their actual use, it being sufficient to “put the activities at the disposal” of the other companies of the group;
  • g) the conditions must be such that any company, in the same circumstances, would be interested in contracting.

In short, the contract must state the total cost or expense that benefits the signatory companies; the criteria for its division, each company necessarily defraying only the benefits actually expected or gained, with the possibility of their identification; and further it must state the manner in which reimbursement of the cost or expense will be made, with the supposition that it will be attractive even for independent companies.

Although the amounts classified as reimbursement of costs and expenses do not reflect any financial gain, which is sufficient to justify the non-incidence of taxation, the Brazilian Federal Revenue has still not adopted a firm position to this effect.

2.1. Payments abroad

Generally speaking, payments, credits or remittances abroad relating to the provision of services are subject to Withholding Income Tax (IRRF) of 15%, the Contribution on Economic Activities (CIDE) of 10%, the Contribution for the Financing of Social Security payable by the Importer of Foreign Goods or Services from Abroad (COFINS-Importation) of 7.6% and the Contribution for the Social Integration Programme and Civil Servants’ Investment Programme due on the Importation of Foreign Products or Services (PIS/PASEP-Importation) of 1.65%. The Tax on Financial Operations (IOF) of 0.38% is due in any case. The Tax on Services (ISS), with the maximum rate of 5%, may also be demanded by the municipality.

The IRRF paid in Brazil may be taken as a credit abroad if there exists a double taxation convention with the country in question, or, at least, reciprocity of treatment.

It is worth mentioning that, in the event of a remittance of funds abroad in payment of services, the financial institutions involved are also responsible for the operation, for which reason they tend to confirm the need to pay the taxes due on the operation in order to avoid any risks.

2.2. Cash receipts from abroad

Payments received by the Brazilian company for services shared may be regarded as corresponding to services exported. In this case, the funds received from companies abroad, in the form of foreign currency, would not be subject to PIS and COFINS on the amount invoiced. In any case, if they are recognised as remuneration for services rendered, they would be subject to IRPJ and CSLL. The ISS on the services may also be demanded by the municipality in question.

3. Possible risks and means for their reduction/elimination

As already stated, the Brazilian Federal Revenue has not confirmed its attitude regarding the non-taxation of payments relating to costs and expenses shared and reimbursed. As a result, in operations involving remittances abroad, the financial institutions normally require to see proof of payment of taxes.

If it is intended to avoid paying tax, and with a view to reducing, and even eliminating, possible risks, it is important that the operations be properly formalised. It must be possible to show, by producing solid evidence, that the funds received from, or paid to, the related party refer to the recovery of expenses incurred for the benefit of another, so as not to generate income/earnings for the recipient.

The contracts signed must contain details sufficient to prove compliance with the requirements necessary for characterisation of the reimbursement, with the resulting non-taxation, and all the supporting documentation must be retained.

An alternative, in order to guarantee the position of the Brazilian Federal Revenue, in principle and preferably in favour of the non-incidence of tax, is the submission of a formal consultation with a view to confirming the interpretation applicable to the case.

Specifically for operations involving remittances abroad of sums relating to the costs and expenses shared, it is possible that, even on production of the contract signed between the companies of the group, together with all supporting documentation, and further even presenting the formal consultation to the public authorities, the financial institution may not agree to make the remittance without payment of the tax.

In this event, a declaration may also be produced to the financial institution, in which the company making the remittance assumes the obligation to inform the institution immediately of the result of the formal consultation, as soon as a reply is received from the Federal Revenue, and also to comply with the result thereof, if necessary, with payment of tax on the operation.

We consider that, provided the above requirements are met, the risks may be reduced or even eliminated.

We are available to assist persons interested in any issues involving this matter.

Patrícia Giacomin Pádua
Partner in the Tax Area – São Paulo
[email protected]

The LGPD and labour relations in Brazil

Non-observance of the LGPD (General Data Protection Law) will give rise to administrative sanctions imposed by the National Data Protection Authority as from August 2021, as determined by article 20 of Law 14.010, which modified the text of article 65 of Law 13.079.

In spite of this, many authorities are already imposing or seeking to impose penalties for failure to comply with the LGPD and are taking court action in this respect. Moreover, there is nothing to prevent data subjects from claiming compensation in court, as well as coercive measures to enforce compliance with the LGPD.

In the context of labour relations, the LGPD is firmly present in the three stages (pre-contractual, contractual and post-contractual), although there are no specific regulations in this respect. Apart from the direct relationship between the company, the candidates for job vacancies offered and its own employees, the LGPD is also present in relations with the employees of outsourced companies.

For the reasons set out in the preceding paragraph, companies must adapt as soon as possible, creating procedures and policies, adjusting their work contracts and agreements for services with independent contractors, training and instructing their work force regarding the law and the care necessary in the treatment of data, thereby avoiding the formation of administrative and judicial liability and the exposure of their name, brand and reputation.

At the pre-contract stage, companies will have to adjust their recruitment and selection processes, deciding whether resumes not used are to be discarded or kept in their database for future vacancies, obtaining, in the latter case, the express consent of the candidate to do so. The companies must also consider that the recruitment and selection processes may be subject to investigation by the competent authorities and/or judicial discussion by these same persons or by the candidate himself, and, in this respect, the treatment of candidates’ data may constitute evidence for their defence, the regular exercise of rights.

In the course of the employment relationship, the applicability of the LGPD is vast, since the employer is obliged to provide personal as well as sensitive data of its employees in order to comply with legal obligations, such as for the E-social, for the DCTFWeb, for the CAT, for the obligatory Occupational Health and Safety Programmes, for the labour inspectors of the Special Secretariat of Social Security and Labour and of the Federal Revenue, unions and class entities, among others.

The employer uses the data of its employees, also, in order to comply with contractual obligations, such as for the provision of benefits, health and life insurance, agreements in general with other companies etc., constituting, therefore, the regular exercise of rights, which strictly exempts it from obtaining the express consent of the employee, provided of course that such benefits are in the latter’s interests or result from a regulatory provision.

The employer may also be obliged to use such data in administrative or judicial proceedings, as determined by the supervisory body or judge, in which case authorisation to supply such information from the employee is not required, since this undoubtedly constitutes a regular exercise of a right.

In the event of an occupational accident or health problems that justify the adoption of measures by the employer for the protection of the life and physical safety of the data subject, in this case, the employee, the company will also have to use his data.

It is essential to mention, if only briefly, the matter of the employee’s consent, since a trend of opinion has already been formed on this point, not only in Brazil, but also abroad, to the effect that it is inapplicable, as a rule, to employment relationships, given the worker’s situation of “hypo-sufficiency” (the weaker party). On this subject, we will express our views in further detail in a future article.

On termination of the employment, the employer should, strictly speaking, eliminate the personal data of its employee, since their purpose has been achieved or they are no longer necessary. However, considering that many of these data may be subject to analysis by the Brazilian authorities and/or constitute evidence in legal proceedings that may be brought against the company, including by the employee himself, they may be stored, for compliance with legal obligations or the regular exercise of rights, for the period in which they may be required; these are situations that, we repeat, do not require consent of the data subject.

The retention period could, in principle, be standardised according to the two-year and five-year limitation periods that apply to the employment relationship. However, there are situations that may exceed these periods, such as cases of accidents at work (including professional and occupational diseases) and death of a worker leaving minor heirs, matters which should be considered when the employer sets the parameters for the storage and destruction of data.

These are the initial observations of our labour team regarding the impact of the LGPD on labour relations. We will continue to produce material on the subject, as there will be many challenges to be faced in the near future.

Maria Lúcia Menezes Gadotti
Partner in Labour Law Area – São Paulo
[email protected]

Bankruptcy Law Reform and COVID-19-related measures for insolvency

In order to deal with the COVID-19 pandemic scenario and to keep the economy stable during the crisis, Brazil has adopted some measures to protect businesses against insolvency and bankruptcy. Whether such measures are pandemic-related or not, they integrate Brazil in a worldwide effort to avoid damages.

In April 2020, the State Courts of Justice of both Sao Paulo and Parana created projects for out-of-court dispute resolution. The first developed a conciliation and mediation project for pre-litigation business disputes and the latter implemented a Judicial Center for Conflict Resolution and Citizenship (CEJUSC) for reorganisation.

The Brazilian National Council of Justice (CNJ) recommended in early August 2020 the creation of CEJUSCs for any business disputes to be settled by ways of negotiation, mediation or conciliation either in out-of-court or court processes. Before that, in March, the CNJ recommended the adoption of measures to mitigate the impact of COVID-19 in reorganisation and bankruptcy processes, e. g. stay period extension in the case the creditor’s meeting needed to be postponed.  However, these recommendations are not mandatory.

The provisions of out-of-court mediation and reorganisation are similar to the Chinese instructions for civil cases involving COVID-19 released in May 2020, which has key content on bankruptcy cases.

Irrespective of its transitory character, the Emergency and Transitional Legal Framework for Private Law Relations (RJET), established by Federal Law No. 14,010/2020, did not regard insolvency, but rather some general provisions, e.g., on statute of limitations and contractual issues.

Although there have been no provisional changes to federal insolvency law facing the COVID-19 pandemic so far, on November 25, 2020, the Brazilian Federal Senate approved the Bill of Law (“Bill”) 4,458/2020 which reforms the Brazilian Bankruptcy Law (Federal Law No. 11,105/2005). The Bill had previously been voted by the Chamber of Deputies and now awaits presidential sanction.

The main objectives of the Bill are, inter alia, to support the economic recovery of businesses, to reduce litigation and court proceedings, to reduce the duration of a proceeding and to stimulate out-of-court processes, such as extrajudicial reorganisation and pre-litigation dispute resolution.

The following topics are the major changes in Brazilian bankruptcy law in connection with the current legislation of other jurisdictions:

   a) Conciliation and mediation on extrajudicial and judicial reorganisation

According to novel articles to be inserted in bankruptcy law, conciliation and mediation shall be encouraged in any court, including superior courts, both before and after the request for judicial reorganisation. These methods are specially recommended when, among others, (i) the dispute involves partners and shareholders of a business in financial distress or in a current judicial reorganisation proceeding; and (ii) the business in financial distress and its creditors are able to renegotiate the debts, before the filling for judicial reorganisation.

Regarding COVID-19 and public calamity, the Bill encourages conciliation and mediation during the judicial reorganisation proceeding in the cases there are “extraconcursais” credits.

   b) Creditors can provide the judicial reorganisation plan

In the case the judicial reorganisation plan submitted to creditors approval is rejected, the judicial administrator puts the proposition to the creditors’ meeting vote. If the creditors do not agree to provide a reorganisation plan or the creditors’ plan is rejected, the judicial reorganisation will be converted into bankruptcy.

   c) The adoption of transnational insolvency

The Bill integrates to Brazilian legal framework the possibility of transnational insolvency based on UNCITRAL Model Law on Cross-Border Insolvency, seeking for international cooperation, uniformity of application and respect to good faith.

Among several and detailed provisions, there are sections to regulate the recognition of foreign processes, the cooperation with foreign authorities and representatives and the concurrent processes. The latter is related to the extrajudicial and judicial reorganisation or bankruptcy proceedings to commence after the recognition of a foreign main process.

The Brazilian Prosecutors Office will also intervene in such processes.

   e) The possibility to consolidate group estates

The Bill innovates by authorising debtors under common corporate control to request for judicial reorganisation by means of procedural consolidation. Exceptionally, the judge can also authorise substantial consolidation if there is interconnection or confusion of assets or liabilities among the debtors plus at least two other situations. In this case, assets and liabilities are considered to be of a single debtor.

   f) The judicial reorganisation of the rural producers

This topic puts an end in a great discussion among state courts in Brazil. The rural producers can request for judicial reorganisation even if their commercial register does not meet the required period of registry. Such period may be proved by using the documents of the activities performed, including, e.g., Digital Cash Book and balance sheet.

g) General novelties: regulation of dip financing (debtor in possession financing); broader cases of bankruptcy declaration; increase number of outstanding tax debt instalments; stay period extension.

Once sanctioned by Brazilian President, the Bill will enter into force in thirty days after publication on the Official Gazette.

Referências:

“CEJUSC Recuperação Empresarial” é implantado na comarca de Francisco Beltrão. Tribunal de Justiça do Paraná. Disponível em: https://www.tjpr.jus.br/noticias/-/asset_publisher/9jZB/content/id/35253519

COVID-19 and the Current State of Insolvency in China. The University of Melbourne. Disponível em: https://law.unimelb.edu.au/centres/alc/engagement/asian-legal-conversations-covid-19/alc-original-articles/covid-19-and-the-current-state-of-insolvency-in-china

Guiding Opinions of the Supreme People’s Court on Several Issues Concerning the Proper Trial of Civil Cases Involving the New Coronary Pneumonia Epidemic Situation (2). The Supreme People’s Court of the People’s Republic of China. Disponível em: http://www.court.gov.cn/fabu-xiangqing-230181.html

Nova Lei de Falências é aprovada pelo Congresso Nacional. Ministério da Economia. Disponível em: https://www.gov.br/economia/pt-br/assuntos/noticias/2020/novembro/nova-lei-de-falencias-e-aprovada-pelo-congresso-nacional

Provimento CG nº 11/2020. Tribunal de Justiça de São Paulo. Disponível em: https://www.tjsp.jus.br/Download/Portal/Coronavirus/Comunicados/Provimento_CG_N11-2020.pdf

Recomendação Nº 63 de 31/03/2020. Conselho Nacional de Justiça. Disponível em: https://atos.cnj.jus.br/atos/detalhar/3261

Recomendação nº 71 de 05/08/2020. Conselho Nacional de Justiça. Disponível em: https://atos.cnj.jus.br/atos/detalhar/3434

Tabela de principais mudanças do PL nº 4.458/2020. Ministério da Economia. Disponível em: https://www.gov.br/economia/pt-br/assuntos/noticias/2020/novembro/arquivos/TabelaLeide_Falencias.docx.pdf

Alternatives for restructuring of intercompany debts

The continued devaluation of the Real has increased the total indebtedness of Brazilian subsidiaries of foreign groups that incurred debts in foreign currency, particularly in relation to the U.S. dollar and the Euro, and these subsidiaries are now seeking ways of restructuring the debts to their parent companies. Such devaluation may cause very serious impacts, affecting financial results and possibly making the debts unpayable.

It is a fact that there has been a significant positive variation of the U.S. dollar in relation to the Real in the last few years. By way of example, the average annual dollar/real rate in 2015 was approximately R$ 3,34 and the average partial annual rate for 2020 calculated up to July 31, 2020 was R$ 4,98 , the rate today being more than R$ 5,60. In view of this scenario, the need has arisen to discover what action permissible under Brazilian law may be taken to restructure intercompany foreign currency debts, in order to reduce risks and negative impacts related to the exchange variation for the Brazilian subsidiaries.

For an analysis of such action, we have separated the debts, by their nature, into three groups: loans, importations and other types of debt.

As far as the first group is concerned, namely foreign currency loans, the principal amount and interest may be converted into a direct investment, whereby the total amount due will be converted into quotas or shares in the Brazilian debtor company, by establishment or increase of the creditor’s equity interest in the said company. However, in relation to this group it must be borne in mind that loans converted into direct investment in a period of less than 180 days from the date of entry of the funds will be subject to IOF (tax on financial operations) at the rate of 6%, plus penalty and interest from the date of entry of the funds into the country, whereas loans made and converted over longer periods will benefit from a zero rate for the same operation, pursuant to article 15-B, items XI and XII of Decree 6.306/07.

It is important to note that for any symbolic foreign exchange operation, whether of the type now referred to or any other described in the legislation such as those below, the rate of IOF on the exchange is also reduced to zero rather than the usual 0.38%, in accordance with article 15-B, item XVIII of Decree 6.306/07.

It must also be pointed out that the total amount of interest, if converted into capital, will be subject to the withholding income tax at the rate of 15%, since the conversion is regarded as being a form of payment of the obligation.

Also in relation to loans, if the conversion into capital is not a feasible alternative, but it is intended even so to avoid the risk of the foreign exchange variation, there is the possibility of switching to Reais the foreign currency applicable to the loan.

Another operation that merits attention for the purpose of restructuring debts in foreign currency involves importations, which may be converted into a loan, preferably with a change of currency into Reais, since the intention is to eliminate the risk of foreign exchange variation, or into direct investment.

For conversion of debts incurred on importation into a loan in local currency, it is necessary for the creditor formally to express its intention of doing so by means of a declaration, stating that the amount of the loan will be in Reais, to be calculated at the moment of the simultaneous exchange operations. Special attention should be paid to the incidence of IOF, the ideal solution being that the loan in question stipulate a repayment term of at least 181 days from the conversion, in which case a zero rate will be applied.

Conversion of the importation into direct investment may take place at any time by means of a declaration by the creditor and acceptance by the debtor, resulting in simultaneous symbolic foreign exchange operations.

As regards other foreign debts of an unspecified nature, these may be converted into a loan or direct investment, in the same way as importations, since any obligation that involves payment abroad may be converted, the only requirement being a formal statement by the creditor to that effect. However, it should be noted that some operations involving certain debts may give rise to the incidence of taxes as a result of their nature and must be considered specifically for the purpose of conversion. In this connection it must always be borne in mind that the exchange on sale of foreign currency on the conversion, the first leg of the symbolic operation, gives rise to the same effect as in the case of actual repayment.

It should be mentioned that the figures resulting from the conversions will be calculated in accordance with the exchange rates on the date of the symbolic operations for the conversion rather than the historic value of the debts in any of the cases above.

In relation to debts that are not capable of registration under the foreign exchange legislation, and cannot therefore be the subject-matter of a symbolic exchange operation for conversion, in accordance with Law no. 11.371/06, there is still the possibility of conversion into direct investment with the registration of so-called “contaminated” capital, which, although feasible, must be considered with great care.

Finally, before carrying out any restructuring of foreign currency debts, it is necessary to confirm that the information lodged with the Central Bank of Brazil is up to date, and also to consider from the group structural viewpoint the best option to be adopted.

Deborah Henriques Grasmann de Carvalho and Adolpho Smith de Vasconcellos Crippa

Associate lawyer and Partner in Company Law Area – São Paulo

[email protected] and [email protected]

A matter of suitability: the CIArb Guidelines on Witness Conferencing

In April 2019, the Chartered Institute of Arbitrators released its Guidelines for Witness Conferencing in International Arbitration. The document was developed for use by parties, arbitrators and experts when preparing and presenting evidence in such a conference.

   1. The Witnesses Conferencing: overview

Witnesses conferencing is an evidence-taking process by which two or more witnesses give their evidence concurrently before the arbitral tribunal. According to the Guidelines, it is not a single process, so it can assume different forms in order to assure the efficiency and effectiveness of taking of evidence and procedural orders.

The conferences concern the presentation of evidence of both factual and expert witnesses, although they have been more adopted for the latter. The tribunal, the parties’ or witnesses’ counsel or a combination of these may be responsible for the conduction of the process.

The CIArb document lists some advantages of the adoption of witnesses conferencing. Some examples are the effectiveness brought by conference when receiving the evidence, in comparison with consecutive examination; the improvement of the quality of evidence; and the efficiency brought by an evidentiary hearing, when the tribunal can hear the witnesses at the same time.

It is important to emphasise that the parties and the tribunal need to determine whether this evidence-taking process is the best option for their case. Even though the witness conferencing is adopted, its procedures shall be analysed and suited to the circumstances of the dispute.

   2. The Guidelines

The Guidelines contain as main sections the Checklist, the Standard Directions and the Specific Directions, besides Explanatory Notes with detailed information regarding the Checklist and the two groups of directions.

The Checklist sets out matters to be considered by the parties and the tribunal when determining if the witness conference may be adopted and, in such case, what form the conference may take. A matter of logistics, e.g. if “one or more witnesses is to give evidence by video conference”, refers to both questions of the suitability of the process and the form it should take at the same time. However, the Guidelines warn that “not all of the items […] will be relevant in all cases”.

The Standard Directions are a framework intended to be part of an initial procedural order issued by the arbitral tribunal. It sets principles to be applied when the tribunal “subsequently orders some of the witness evidence to be taken concurrently”. Nevertheless, it does not mean that the taking of consecutive evidence is dispensed.

The Specific Directions apply once the parties and the tribunal decided to adopt the process of taking evidence concurrently. It provides three different procedural frameworks: Tribunal-led Conference, Witness-led Conference and Counsel-led Conference. The Guidelines also allow the tribunal to combine these frameworks, to draw on different directions and to incorporate other directions. The aim of this section is to point which direction may be the most suitable for the case.

The CIArb Guidelines are an important document to assist the parties and the tribunal due to their flexibility and precise information. Once the suitability of the witness conferencing is carefully analysed, the Guidelines may help the international arbitration players even after the adoption of the process.

The Chartered Institute of Arbitrators received this year the Global Arbitration Review Award in Bert Innovation by an organisation for the Witness Conferencing Guidelines.

Digital justice in Brazil

The National Justice Council (www.cnj.jus.br) of Brazil has just approved the adoption of a totally remote system of Justice by the Judiciary instances. Known as “100% digital Justice”, it will be an option to the parties in a judicial procedure.

For the moment, the system, when adopted by the Brazilian courts, will be facultative. However, the CNJ understands that it will bring more efficiency to the proceedings, meeting the constitutional principle of the reasonable duration of the judicial process, a fundamental right, according to the Brazilian Constitution.

The decision was made considering the successful experience that the courts had with the remote proceedings adopted during the COVID-19 pandemic.

Brazil implemented the electronic process system in 20**. Since then, many measures are being taken to eliminate paper based process. Now, the digital era is covering all the system, including hearings and judgement sessions.

It seems that Brazilian Justice maybe very close to the on line courts model, in the words of Richard Susskind, strengthening the idea that Justice is a service, and not a venue.