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TRANSITIONAL TAX REGIME: NORMATIVE INSTRUCTION FROM BRAZILIAN TAX AUTHORITY 1.397/2013

In 2008 Brazilian Accounting Standards were aligned with IFRS. The so- called Transitional Tax Regime ( " RTT " in Portuguese Language) was introduced in 2009 by Law 11.941/2009, defining that, for tax purposes, companies should record its revenues, costs and expenses in accordance with the accounting rules in effect before conversion to IFRS.

Below the main changes introduced by the Normative Instruction:

  • ØBookkeeping Tax ( " ECF " in Portuguese Language ) : A new accessory obligation was introduced and will be delivered in June 2015 compared to fiscal year 2014. Such accessory obligation is the digital version of the financial statements prepared in accordance with accounting rules in force prior to the conversion to IFRS.
  • ØDigital Bookkeeping Tax on Income Tax and Social Contribution on Net Income of Corporations ( " EFD - Income tax " in Portuguese Language ) : The Normative Instruction 1.397/2013 introduced a more detailed filling in the “EFD – Income Tax” , whose requirement for the year 2014 was introduced by Normative Instruction 1.353/2013 , published on May 2, 2013 . The submission of the “EFD – Income Tax” should occur in June 2015. In relation to activities undertaken in the year 2013, currently the existing accessory obligations  must still be prepared and submitted in June 2014.

Taxation of Dividends : Whereas the basis for the payment of dividends is net income calculated based on the new Brazilian Accounting Rules (aligned to IFRS) and the payment  of dividends is exempt in Brazil ( Law 9.249/95 , article 10 ) , the “Attorney General of the National Treasury” issued the Legal Opinion  n°   202/2013 ,  clarifying  that  the  exemption  to  the payment of dividends only applies to the amount of dividends calculated in accordance with the  Accounting Standards Rules in force in 2007. The Normative Instruction 1.397/2013 confirmed the understanding of the “Attorney General of the National Treasury” setting the tax applicable to dividends potentially paid in excess of the profit for tax purposes , as follows :

  1. a)Individuals Residents in Brazil - Individual Income Tax will apply to the progressive rate ( 7.5 % to 27.5 % )
  1. b)Brazilian Legal Entities - the dividends in excess of the calculated profit for tax purposes should be included in taxable income calculation basis, subject to regular income tax and social tax (the combined rate is 34 % for companies in general and 40 % for financial institutions, insurance and entities regulated by the Central Bank of Brazil) and
  1. c)Non- resident - Income Tax Withheld at- will be due at the rate of 15 % ( 25 % in cases where the remittance is made to jurisdictions considered  “tax havens" )
  • ØInterest on Capital (“JCP” on Portuguese Language): As already confirmed by Brazilian Tax Authority the basis for calculating the deductible interest on capital is the company's stockholders equity calculated based in the Accounting Standards effective in 2007 (before conversion to IFRS).

In practice this instruction requires the company to produce two Balance Sheets: (i) one based on IFRS and (ii) another based on old rules, for the purposes for calculating taxes.

Additionally, the Normative Instruction 1.397/2013 emphasizes that the premium on issue of debentures , the investment grants and donations and investments valued by equity should be calculated based on the accounting standards in force before the conversion to IFRS.

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