Revista Brasileira de Direito Aeroespacial
Taxation on Cross-Border Leases of
Prepared by Ricardo E. Vieira
Carlos Henrique T. Bechara and
Pedro Augusto L. S. da Cruz Nunes,
partner and associates, respectively, of
Pinheiro Neto - Advogados, Rio de Janeiro.
1. - The purpose of this article is to present general information on the recent changes of Brazilian tax legislation generally applicable to the import of vessels and aircraft under charter, operating or financial leases into Brazil.
Withholding Income Tax
2. - Until the end of December 1998, the Brazilian withholding income tax assessed on the remittance abroad of payments due under cross-border aircraft operating leases as well as on the international charter of vessels (including ships and oil drilling rigs, among others) was reduced to zero as a general rule.
3. - The Brazilian withholding tax levied on remittances abroad of payments due under cross-border financial leases of capital goods was also reduced to zero.
4. - Such withholding tax reductions were contemplated by Law No. 9481 of August 13, 1997 as amended by Law No. 9532 of December 10, 1997.
5. - In accordance with Law No. 9481/97 as amended, the Brazilian withholding tax rate assessed on freights, charters, rents or operating leases of fluvial or maritime vessels or foreign aircraft entered into by legal entities would be reduced to zero, provided that the transaction had been approved by the competent authorities.
6. - The foregoing rule, however, was now modified by Provisional Measure No. 1788 of December 29, 1998. Provisional measures are adopted by the President of Brazil and shall lose their effectiveness as from the date of their issuance if they are not converted into ordinary law within 30 days as from their publication, in which event the Congress shall regulate the legal relations arising therefrom. Provisional Measure No. 1788 was already approved by Congress and converted into Law No. 9779 of January 19, 1999.
7. - Under Law No. 9779/99, income derived from any transaction in which the beneficiary is a person resident or domiciled in a country in which income is either tax-exempt or subject to a maximum income tax rate lower than 20 per cent (the so-called "tax havens"), will be subject to withholding income tax at the rate of 25 per cent in Brazil.
8. - Cross-border financial leases of capital goods remain subject to the withholding tax rate reduction to zero, regardless of whether the relevant foreign lessor is located in a tax haven or not.
9. - The remittance abroad of payments due under cross-border aircraft operating leases as well as on the international charter of vessels (including ships and oil drilling rigs, among others) will be now subject to the Brazilian withholding tax at the following rates: (i) 25 per cent, when the beneficiary of such payments is domiciled abroad and located in a tax haven, or (ii) zero, for beneficiaries resident abroad and located in other countries.
10. - For withholding tax purposes, there is a controversy on whether the tax event shall be (i) the remittance abroad to be made by the Brazilian lessee/charterer, in which event the new taxation brought by Law No. 9779/99 shall also encompass any remittance due henceforth under agreements already in existence; or (ii) the execution of the relevant agreement, in which case the contracts already in existence shall be grandfathered and not be subject to such new taxation foreseen in Law No. 9779/99.
11. - It is worth mentioning that Central Bank of Brazil regulations have defined expressly the concept of operating leases (arrendamento mercantil operacional) and financial leases (arrendamento mercantil financeiro) for domestic transactions. If the envisaged cross-border operating lease complies with the parameters set forth to classify operating leases (arrendamento mercantil operacional) in the domestic market, there would be legal grounds to support that the withholding tax rate assessed on payments made under the outlined cross-border operating lease should also be reduced to zero, regardless of whether the foreign lessor is located in a tax haven or not. This position was confirmed by the Federal Revenue under Declaratory Act No. 6 of January 21, 1999.
Temporary Admission Ruling
12. - Aircraft, vessels and other goods that are imported into Brazil on a temporary basis under operating lease or charter transactions may benefit from the special customs ruling of temporary admission, pursuant to which the payment of taxes assessed on such import shall be suspended and would only be paid if the good is definitively imported into Brazil.
13. - Pursuant to Law No. 9430 of December 27, 1996, such taxes levied on the import shall be paid in proportion to the period during which the imported aircraft or good stays in Brazil. The applicability of Law No. 9430/96, however, was subject to further regulation.
14. - Law No. 9430/96 has just been regulated by Decree No. 2889 of December 21, 1998.
15. - Under Decree No. 2889/98, the aforementioned proportional payment shall be calculated for federal taxes according to the percentage representing the period that the good will stay in Brazil in relation to the useful life of the good, as established in the Brazilian Income Tax Regulation.
16. - The payment of federal taxes assessed on the import made until December 31, 2001 of certain vessel, equipment and material related to the production or exploitation of oil or natural gas as listed below, however shall continue to be suspended during the term that the good stays in Brazil and not be subject to said proportional payment of taxes.
17. - The aforementioned list of goods that may be imported through the temporary admission ruling without being subject to federal taxes under Decree No. 2889/98 is as follows:
(a) vessels destined to render support to the activities of exploitation, drilling, production and storage of petroleum or natural gas;
(b) equipment used to obtain of geological, geophysical and geodesic data related to petroleum research;
(c) equipment for the rendering of ancillary services related to the drilling and production of petroleum;
(d) floating cranes used in maritime rigs destined to the drilling or production of petroleum;
(e) risers used in the drilling and production of petroleum;
(f) fixed units destined to the exploration, drilling or storage of petroleum or natural gas;
(g) floating or semi-submersible units destined to the drilling or exploration of petroleum; or
(h) remote-controlled submarine vehicles to be used in the exploration, drilling or production of petroleum.
18. - The temporary import of aircraft into Brazil was not included in such exception and henceforth shall be subject to the rules established in Decree No. 2889/98.
19. - Decree No. 2889/98 establishes that the temporary admission ruling shall be granted for the time of duration of the relevant agreement and renewable in accordance with the contractual proviso. Based on this provision, in our view the import of aircraft under operating leases may from now on classify under the temporary admission ruling regardless of the term of duration of the aircraft operating lease agreement. Formerly, the temporary admission status could only be granted for cross-border aircraft operating leases during one year, renewable for a term not exceeding five years in the total period. The Federal Revenue already issued Normative Instruction No. 164 dated December 31, 1998, which confirms such position.
20. - As a general rule, taxation levied on the import of aircraft into Brazil will now be applicable as follows:
(a) for aircraft financial leases: import tax - "II" and tax on manufactured goods - "IPI" (the rate of both of which may be reduced to zero depending on the maximum take-off weight of the relevant aircraft), plus the state tax on the supply of goods and certain services - "ICMS" (the tax basis and due payment of which may be reduced and deferred based on the purchase option under certain state legislation); and
(b) for aircraft operating leases: import tax - "II" and tax on manufactured goods - "IPI" (the rate of both of which may be reduced to zero depending on the maximum take-off weight of the relevant aircraft), plus the state tax on the supply of goods and certain services - "ICMS". The payment of federal taxes ("II" and "IPI") shall be made in proportion to the time the aircraft remains in Brazil, if made under the temporary admission regimen.
21. - State legislation shall regulate the payment of "ICMS" for imports made under the temporary admission regimen. Under current legislation prevailing in the State of Rio de Janeiro, for example, no ICMS shall be levied on imports made under the temporary admission regimen.
Brazilian Withholding Tax Rates assessed on remittances of
payments by a Brazilian company to
a beneficiary resident or domiciled abroad under
Cross Border aircraft lease transactions
Nature of Agreement
December 31, 1998
Execution as from
January 1, 1999
(i) if beneficiary is located in a Tax Heaven (**): 25 per cent;
(ii) if beneficiary is not located in a Tax Heaven: zero
Operating Lease (***)
(*) According to Declaratory Act No. 8 issued by the Federal Revenue Office on January 29, 1999, remittance of payments due under freights, charters, rents or operating leases of fluvial or maritime vessels or foreign aircraft entered into by legal entities will not be subject to the 25 per cent withholding tax rate established by Law No. 9779/99 even if the foreign beneficiary is located in a Tax Heaven, as defined under applicable Brazilian legislation, provided that the transaction had been approved by the competent authorities.
(**) Law No. 9430 of December 27, 1996 defined Tax Haven as the country in which income is either tax-exempt or subject to a maximum income tax rate lower than 20 per cent.
(***)The concept of operating lease (arrendamento mercantil operacional) for domestic transactions is given by Resolution No. 2309 issued by the Central Bank of Brazil on August 28, 1996 (as amended by Resolution No. 2465 of February 19, 1998), as follows:
(a) installments to be paid by the lessee shall include the cost to lease the asset and the services inherent to placing them at the disposal of the lessee, provided that the present value of payments shall not exceed 90 percent of the cost of the lease asset. The same financial conditions established in the lease agreement shall be used for the purposes of calculation of the present value of such payments;
(b) the lease term shall be less than 75 per cent of the economic useful life of the leased asset;
(c) the price of the purchase option shall be the marked value of the leased asset;
(d) there shall be no provision for payment of the guaranteed residual value - VRG; and
(e) maintenance, technical assistance and services related to operation of the leased asset may be incumbent on either the lessor or the lessee.
The Central Bank of Brazil is expected to issue specific regulation to confirm whether the same concept adopted by the Central Bank of Brazil for operating leases carried out in the domestic market as described above shall also be used for cross-border transaction or not.
Rio de Janeiro, February 8, 1999
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