Brazilian Tax Authorities issue Draft Legislation and Regulations introducing Pillar 2

Last Thursday, October 3, Provisional Measure (PM) nº 1,262 and the Public Consultation on Normative Instruction (NI) RFB nº 2,228 were published, establishing and regulating, respectively, the Brazil´s QMDTT, in the form of an Additional Social Contribution on Net Profit (CSLL) payment as a means of adapting Brazilian domestic legislation to the OECD’s GloBE Rules.

Firstly, CSLL is a Brazilian tax levied on Corporate Profits, with the same calculation basis as the Corporate Income Tax (IRPJ), with a tax rate of 9%, increased to 15% for financial services, resulting in a consolidated taxation on Corporate Income of 34% or 40% in the case of Financial Services. In this sense, the Brazilian legislative solution to introduce the Qualified Domestic Minimum Top-up Tax was not a creation of a new tax or an adjustment of the Corporate Income Tax, but rather an additional taxation of the CSLL.

In principle, foreign tax credits should not pose a problem for any businesses which operate or with controlled companies in Brazil as the most common position is to recognize that the CSLL is also included the scope of art. 2 of Brazilian Double Tax Treaties. A good example of this is the addendum to the treaty between Brazil and Belgium, in which it is stated that the taxes described in article 2, paragraph 2 of the original treaty include the CSLL.

As stipulated in Article 2 of PM No. 1,262/24, the additional tax aims to ensure an effective minimum taxation of 15%, classifying the Additional CSLL as a QDMTT according to §1 of Article 3 of the PM.

In line with the GloBE Rules, it applies only to Constituent Entities of a Multinational Enterprise Group with annual turnover of €750,000,000.00 (equivalent to R$4,492,500,000.00 as of October 7, 2024) or more in the Consolidated Financial Statements of the Ultimate Parent Entity in at least two of the four fiscal years immediately preceding the analyzed year.

The new feature brought into Brazilian Law by the PM is the creation of a clear concept of a permanent establishment under item X of Article 5. It shall defer the definition to existing double taxation treaties or, if none exist, will be defined as a “deemed business facility in relation to which a jurisdiction taxes, according to its law, the income or profit attributable to that business facility on a net basis similar to how it taxes its resident taxpayers.”

The referenced 15% minimum tax burden pertains to the expense related to Covered Taxes in the calculation of the accounting Net Profit or Loss for the period, with adjustments made as per Annex II of the PM.

Under Article 35 of the PM, any Additional CSLL not collected due to judicial or administrative litigation cannot be used as a credit in the application of the GloBE Rules by the company, regardless of circumstance, fiscal year, or jurisdiction.

On the other hand, NI No. 2,228/24 regulates the content of the PM, especially concerning:

i) currency conversions,

ii) term definitions,

iii) adjustments for determining GloBE Profit or Loss

iv) effects of corporate restructurings,

v) several aspects regarding calculation basis and compliance.

Along with NI RFB No. 2,228/24, a public consultation was opened, questioning whether the NI contains all the necessary elements for the Additional CSLL to be considered a QDMTT and if there are specific issues in the legal system that would require further considerations in the regulation. Another relevant point of the consultation is to assess the importance of including examples in the regulation and in which specific situations, which could result in a reform of how tax regulations are implemented in Brazil.

Although the main points of the regulation are already present in the Instruction, further amendments may still be made, especially regarding how its terms are presented in the norm.

ALMA Law is available to address any questions or concerns on the subject.

Authors: Francisco Lisboa Moreira and Pedro Alaminos Gonçalves