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New flexibility on the remittance of royalty payments abroad

In the last days of December 2022, new regulations entered into force easing up the remittance of royalty payments abroad. However, local requirements still demand the attention of the Brazilian companies making such payments. Please find herein below an overview of the new rules.

1) The new Legal Framework for the Brazilian Foreign Exchange Market – Law n. 14,286/2021 and impacts on the Technology Transfer and IP License Agreements.

This new law is part of the innovation agenda of the Brazilian Central Bank, entered into force on the last December 30, 2022, one year after its official publication. Among the changes brought about by the new law, it alters certain fundamental rules on the remittance of royalties from Brazil to foreign countries and the submission of control and statistical macroeconomic information to the Brazilian Central Bank (“BACEN”).

Please find herein below the main changes related to the technology transfer and IP license agreements:

  • The revocation of the obligation of recordal of technology transfer and IP license agreements before the Brazilian Patent & Trademark Office (INPI) and before the Brazilian Central Bank for the obtainment of authorization to the remittance of the payment to foreign countries of the owed royalties/payments.

Law n. 14,286 revoked the obligation of recordal of Technology Transfer and IP License Agreements before the INPI and Brazilian Central Bank (new reading of article 9º of Law n. 4.131 issued on 1962 and revocation of its 1st paragraph) in order for the the remittance of royalties to foreign countries to be allowed, thus establishing that the remittance abroad of royalties, know-how payments and technical services fees now depend only on proof of payment, in Brazil, of the withholding income tax (WIT).

In view of the above, there are no more ceilings or limitations applied to the remittance of payments and royalties abroad established in technology transfer agreements, regardless if the agreements have been recorded before INPI or not. However, the recordal remains mandatory for the local company to treat such payments as a tax-deductible expense for corporate income tax purposes, and consequently have them deducted during the calculation of its taxable profits. In other words, Law n. 14,286 does not revoke the obligation of recordal of technology transfer and IP license agreements before the INPI for tax-deductibility purposes.

  • The revocation of the limitation of royalty payments between a mother company and its subsidiary.

The new law abolishes the limitations previously imposed regarding the royalties to be remitted abroad between a Brazilian subsidiary and its foreign mother company. Prior to the new law, the remittance of such payments was limited to the maximum deductibility ceilings (between 1% and 5% of net sales in Brazil) applicable for corporate income tax purposes (“IRPJ”) under Ordinance n. 436/58 of the Treasury Ministry.

From now on, such restriction no longer exists, in view of the express revocation of article 14 of Law n. 4131/62 and the sole paragraph of article 50, Law n. 8383/91. Therefore, the contract parties, including if they are related companies, are free to negotiate the royalty rates and payments they wish (that could be higher than the maximum 5% deductibility ceiling currently established by Ordinance n. 436/58 of the Treasury Ministry).

2) Provisional Measure n. 1152, dated December 28, 2022 (“PM 1152”)

PM 1152 alters the transfer pricing (“TP”) rules for the calculation of the corporate income tax (“IRPJ”) and corporate social contribution on net profits (“CSLL”) adopted by the Brazilian local companies which carry out transactions with related parties. This PM is already in force, but it must still be approved by the Brazilian Congress to be converted into law and have its validity confirmed.

The modifications came into force last January 1st, 2023 regarding the Brazilian companies that opt to immediately adopt the new TP rules. However, Brazilian companies also have the option of only adopting such new rules as of January 1st, 2024.

This PM represents a new legal framework for TP, since it aims to adjust the local regulations to the standards already adopted by Organization for Economic Co-operation and Development (“OECD”).

The main changes brought to the scenario of the technology transfer agreements are the following:

  1. Intangible assets transactions will be subject to TP rules and control.

Law 9,430/96 which until now regulated the transfer pricing rules, establishes three (3) different methods for the calculation of such price, adopting certain variations among them and it is upon the Brazilian companies to adopt the method they consider more convenient for each fiscal year.

PM 1,152/22 brought a relevant modification to this scenario since it establishes five (05) different methods for the calculation of the TP, defining however, that based on available data, it will be more appropriate for the Brazilian entities to adopt “the comparable independent price (CIP)”. Such method consists in the adoption of the Arm’s Length Principle, that is, to have the transactions carried out between related parties compared to the others carried out between non-related parties. So, it will be up to the Brazilian Internal Revenue Service (BIRS) the role of regulating the definition of TP, including the possibility of combination of the methods with each other, so that the calculating basis for taxes due on transactions between related companies can be comparable to those transactions carried out between non-related parties.

  1. The revocation of the former deductibility ceilings applied on Royalties and Payments for Know-How and Technical Services Fees.

In which concerns the Royalties and payments for Know-How and Technical Services Fees, the former maximum deductibility ceilings established by Ordinance 436/58 of the Treasury Ministry (between 1% to 5% of the net sales of the local licensee) are being revoked, and the amount of royalties and Know-How and Technical Services Fees will no longer be deductible when related to:

  • Companies located or domiciled in a country or dependency with favored taxation or that are beneficiaries of a privileged tax regime (“tax heavens”); and
  • When the deduction of amounts results in double non-taxation (i.e., if the country of the licensor does not tax royalties).

For the Brazilian entities that opt to immediately adopt the new TP rules in the current year (2023), the maximum deductibility ceilings established by Ordinance n. 436/58 will no longer be applied. To the remaining ones, the revocation of such maximum ceilings will only occur as from January 1st, 2024, when it will become mandatory the adoption of the new TP rules for all Brazilian companies.

3) The publication by the Brazilian Patent & Trademark Office (INPI) of new regulations on the recordal or registration of Technology Transfer Agreements.

On December 30, 2022, the INPI published a resume the of the meeting, in which several directors and members of such Office deliberated on modifications to reduce bureaucracy in the service of recordal/ registration of Technology Transfer Agreements.

During the meeting, it was decided, that the following modifications will be implemented in due course in relation to the procedure of recordal/registration of Technology Transfer Agreements:

  • Acceptance of digital signatures certified by other Public Key Certificate Authorities besides the one currently accepted (named “ICP-Brasil”);
    ...
  • Removal of the obligation to have the initials of the legal representatives of the contracting parties included in all the pages of the documents submitted to INPI’s analysis;
    .
  • Removal of the need to include the signature of 02 (two) witnesses in the last page of documents submitted to INPI’s analysis, as long as a Brazilian city is indicated as the place of signature of one of the contracting parties;
    .
  • Removal of the need to include the statute, bylaws or constitutive act of the legal entity and the last consolidated alteration on its scope of activity and legal representation of the legal entity of the assignee, franchisee or licensee, domiciled or resident in Brazil, in the electronic petitions submitted to INPI;
    .
  • Express acceptance of the concept of license of non-patented technology (know-How). This is because until such decision, usually only non-patented technology (know-how) transfer agreements were accepted and recorded by INPI, in which the Recipient of the technology could not be prohibited by the Supplier to continue using the know-how in its own activities even after the expiration or termination of the Agreement. Such INPI’s outdated position (of not accepting the concept of know-how license) used to lead certain foreign companies to simply deny to transfer know-how to a Brazilian company. So, this decision represents an important development to make easier the negotiation of know-how agreements, mainly because the concept of license of know-how is accepted in the majority of countries worldwide;
    .
  • Authorization for the payment of Royalties in connection with pending Trademarks, Patents and Industrial Designs. INPI decided that royalty payments for pending trademarks, patents and industrial designs (not issued yet) are negotiated by inter-part agreements and therefore royalty payments in consideration to their use must be allowed by INPI. They highlighted that there is already a decision issued by their Attorney General’s Office recognizing that pending trademarks are also an intangible asset with monetary value and therefore they can be subject to royalty payments. INPI also informed that they are submitting a new consultation to their Attorney General’s Office to seek legal grounds for the obtainment of a similar decision embracing authorization for the payment of royalties towards pending patents, industrial designs and other IP assets as well.

.

Finally, we call your attention to the fact that with the change of Government which took place in Brazil on January 1st, 2023, the entire Board of the INPI was exonerated (on January 2nd, 2023) and new directors will be appointed soon. Therefore, we cannot disregard the possibility of the new directors could revoke such decisions aimed to reducing bureaucracy that were approved at the end of December 2022. Naturally, if and when there is any news, we shall immediately revert to you.

For more information or clarification, please do not hesitate to contact us at mail@kasznarleonardos.com

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