If you’re a Brazilian entrepreneur and you intend to open a company in Asia, you need to be aware of the Brazilian rules for Controlled Foreign Corporations (CFC rules).
This regime imposes taxation on undistributed profits of foreign companies controlled directly or indirectly by Brazil-resident individuals, if the company meets either of the following conditions:
(a) is located in a jurisdiction with favoured taxation (tax haven) or is beneficiary of a privileged tax regime; or
(b) has active income below 60% of total income.
The Federal Revenue (RFB) list of privileged tax regimes is in Normative Instruction 1037/2010. The definition of “active income”, in turn, comprises income from business activities (which excludes passive income: interest, dividends, royalties).
The following paragraphs show how these regimes apply to Hong Kong and Singapore.
Hong Kong is a tax haven according to the RFB list. This means that, if a Brazilian-resident individual controls a company in Hong Kong, he or she is subject to pay taxes on the undistributed profits of this company.
Singapore, in turn, has been removed from the list of tax havens in the RFB list. However, many tax regimes for specific sectors in Singapore are still considered to be privileged by the RFB (for example, special rate of taxes for shipowners and exemptions for insurance businesses). This means that, as long as active income is above 60%, the mandatory CFC taxation only occurs if the company applies for any of these specific regimes.
Brazil grants a credit relief for the taxes paid abroad, up to the limit of the Brazilian rate for CFCs (15%).
In summary, if a Brazilian individual wants to invest in a foreign jurisdiction, he or she must be mindful of the interaction between the tax systems of Brazil and the target country.
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