Brazil Enacts Domestic Minimum Tax Law and Issues Amended Regulations

Legislation

On October 3, 2024, Brazil issued Provisional Measure No. 1,262, of October 3, 2024, to introduce a Domestic Minimum Tax from January 1, 2025. It is designed to meet the requirements of the OECD Model Rules and Administrative Guidance and qualify as a Qualified Domestic Minimum Top-Up Tax (QDMTT) for GloBE purposes.

Normative Instruction No. 2,228, of October 3, 2024 was also issued to provide the detailed rules for the application of the QDMTT.

The income inclusion rule (IIR) and under-taxed profits rule (UTPR) are not included.

Whilst Brazilian Provisional Measures are equivalent to Federal Law, they need to be ratified by the Brazilian Congress within 60 days, (extendable for an additional 60 days). If the Provisional Measure is not ratified by Congress, it will become ineffective.

On December 30, 2024, Brazil’s President enacted Law No. 15,079, of December 27, 2024 (‘the Law’) that repeats (with minor amendments) Provisional Measure No. 1,262, of October 3, 2024, to introduce a Domestic Minimum Tax (DMT) from January 1, 2025.

On December 31, 2024, Normative Instruction No. 2245, of December 30, 2024 was issued which implements the detailed regulations for the provisions of the DMT as provided in Normative Instruction No. 2,228, of October 3, 2024, with a number of amendments.

General

Article 3 of the Law states that the DMT has been drafted and will be periodically updated so that it is in line with the reference documents approved by the OECD Inclusive Framework, and its provisions shall be established so that it is a Qualified Domestic Minimum Top-up Tax (QDMTT) for GloBE purposes.

Article 1 of the amended Normative Instruction provides that it includes the OECD Model GloBE Rules, the Commentary to the GloBE Rules, the Agreed Administrative Guidance and the other rules, guidelines and procedures (‘Reference Documents’), approved by the OECD Inclusive Framework until December 2023.

As such, the Normative Instruction includes most aspects of the first three sets of OECD Administrative Guidance, and most of the provisions of the Model GloBE rules and Commentary are included, subject to the mandatory and optional deviations permitted for a QDMTT.

Article 1(4) of the amended Normative Instruction confirms that the aim of the regulation is for the DMT to meet the requirements to qualify as a QDMTT. The Reference Documents are also expressly stated to be subsidiary sources of interpretation for Brazilian tax purposes providing they are approved by the Special Secretariat of the Federal Revenue of Brazil.

The Normative Instruction includes the Transitional CbCR Safe Harbour (updated for the December 2023 Administrative Guidance) and the Simplified Calculations Safe Harbour for Non-Material Constituent Entities.

Administrative Guidance

The Normative Instruction reflects most of the key elements of the February, July and December 2023 OECD Administrative Guidance. As such, the following are included:

-Rebasing monetary thresholds in the GloBE Rules (Article 1.1 and AG2)

-Deemed consolidation test (Article 1.2)

-Sovereign wealth funds and the definition of Ultimate Parent Entity (Article 1.4)

-Clarifying the definition of ‘Excluded Entity’ (Article 1.5)

-Meaning of “ancillary” for Non-Profit Organisations (Article 1.6)

-Forex hedge election (Article 2.2)

-Excluded Dividends – Asymmetric treatment of dividends and distributions (Article 2.3)

-Debt release election (Article 2.4)

-Accrued Pension Expenses (Article 2.5)

-Excess negative tax carry-forward guidance (Article 2.7)

-Substitute Loss carry-forwards (Article 2.8)

-Equity Gain or loss inclusion election (Article 2.9)

-The extension of the taxable distribution method election to insurance investment entities (Article 3.1)

-Restricted Tier One Capital (Article 3.3)

-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Article 3.4)

-Portfolio shareholding election (Article 3.5)

-Application of Tax transparency election to Mutual insurance companies (Article 3.6)

-Transitional rules (Article 4)

-Additional rules (such as the deemed 50% requirement where employees perform work outside the employer’s jurisdiction for the SBIE) (Second Set of OECD Administrative Guidance).

The Transitional CbCR Safe Harbour aspects of the Third Set of OECD Guidance are also included (see below)

Safe Harbour and Penalty Relief Guidance

The Normative Instruction provides for the application of the:

-Transitional CbCR Safe Harbour;

-Simplified calculation for Non-Material Constituent Entities Safe Harbour.

The Safe Harbours tie in with the OECD guidance in its published Safe Harbour Guidance and the July 2023 and December 2023 Administrative Guidance.

Therefore, the various amendments to the Transitional CbCR Safe Harbour in the December 2023 OECD Administrative Guidance are reflected. This includes:

-Transitional CbCR – Purchase Accounting Adjustments (consistent reporting condition, goodwill impairment adjustment) (Article 1)

-Transitional CbCR – JVs (Article 2.2.1)

-Transitional CbCR – Same Financial Statements/Local Financial Statements for Statutory Reporting (Article 2.3.1)

-Transitional CbCR – Using different accounting standards (Article 2.3.2)

-Transitional CbCR – Adjustments to Qualified Financial Statements/Dividend Mismatches (Article 2.3.3)

-Transitional CbCR – MNEs not required to file CbC Reports (Article 2.3.4)

-Transitional CbCR – Qualified Financial Statements for PEs (Article 2.3.5)

-Transitional CbCR – Treatment of Taxes on income of PEs, CFCs, and Hybrid Entities (Article 2.3.6)

-Transitional CbCR – Treatment of hybrid arbitrage arrangements (Article 2.6)

Amended Normative Instruction

The amendments to the Normative Instruction are predominantly technical in nature to clarify the application of a number of aspects. A new Article 47A introduces the passive income limitation but only from the perspective of taxes allocated to the constituent entity owner.

Under Article 47 of the Normative Instruction, where a Constituent Entity owner is subject to tax under a CFC regime in respect of the Constituent Entity, the amount of any relevant taxes included in the financial accounts for the Constituent Entity Owner are:

-excluded in the calculation of the Adjusted Covered Taxes of the Owning Constituent Entity; and

-disregarded in the calculation of the Constituent Entity’s Adjusted Covered Taxes.

The new Article 47A provides that the amount of CFC taxes included in the financial accounts of the Constituent Entity Owner may be included in the calculation of the Adjusted Covered Taxes of the Constituent Entity Owner where they relate to Passive Income earned by the Constituent Entity, and subject to the Passive Income limitation (as provides in Article 4.3.3 of the OECD Model Rules).