The import of service is heavily taxed in Brazil and it follows its own tax regime. This has always imposed an important challenge to services companies that wanted to operate in the country without opening a local subsidiary. In this case, depending of the volume of the operation in Brazil, opening a local subsidiary might be key to be competitive in the market.
All information related to service transactions between residents in Brazil and residents abroad must be under SISCOSERV awareness, a national system created by the government to control trading of international services. The Brazilian client (service taker) must have in mind that they will be the ones responsible for collecting all the taxes, as the government will not be able to charge the foreign company (see overveiw at the end of article).
Which payment is subject to which tax?
The contribution on the intervention on the economic domain (CIDE) is a Federal levy assessed on amounts paid, credited, delivered or remitted abroad for the payment of royalties (other than for the licensing of software) and certain services. The rate is currently set at 10% and is payable by the company making the remittance. CIDE applies to:
- the supply of technology;
- the provision of technical assistance (support and specialized technical services), where there is transfer of technology;
- administrative and similar services;
- the transfer and licensing of trademarks;
- the transfer and licensing of patent explorations.
Imports of services, technical assistance, technology, etc., have to take into account whether or not the relevant payment is subject to the 10% CIDE royalty tax. The application of this tax will determine the applicable rate of withholding tax: where CIDE-Royalty applies, the withholding tax is usually 15%; otherwise, the rate is 25%.
How to reduce the tax burden of both the service taker and provider
When the service is paid through a regular bank transfer from a Brazilian bank account, the Brazilian party will have to demonstrate a taxation document named DARF (Documento de Arrecadação de Receitas Federais – or Document for Receipt of Collection of Federal Income) and a tax payment confirmation before the money is released out of the country. As the Income tax is a withholding tax, it means that the money the Brazilian service taker transfers to the Swiss service provider will be deducted from the IRRF (15 or 25%). This creates a great impact and rises considerably the final costs of the operation.
In case of software and services supplied via IT, there are different options to consider that might reduce the tax burden for both the service taker and provider.
Calculation is key
It is not uncommon that foreign services providers require their Brazilian clients to bear the cost of any withholding tax, meaning that they want to receive the entire amount of the services net of any Brazilian withholding taxes. In this case, the Brazilian client needs to gross-up the value of the services before calculating all applicable taxes or the Swiss service providers need to calculate the price taking into consideration the withholding tax.
It is important to state that taxes will represent close to 48% of the operation on total considering the taxes the service taker will have to pay and the tax retained in the bank transfer.
A local subsidiary can help your business
As shown above, the tax burden can be very high, especially if the Swiss service provider would like to receive the payment net of any Brazilian taxation. In general terms, services companies that want to enter the Brazilian market and forecast reasonable amount of services to be sold in the country, end up opening a local subsidiary to avoid this heavy taxation.
As some services might be exempt from one or more of various taxes imposed on the importing of services, it is always important to consult an experienced tax advisor in Brazil to understand the impacts of service import in the country. Please feel free to contact the Swiss Business Hub Brazil to organize an initial call with an expert and your team for further clarification on your particular situation.