Confinement of Brazilian Companies
The first decades of the 21st century stood out for a worldwide flow of people and information of unprecedented intensity. In Brazil, the economic and political crisis that undermined the country for the last few years was an emigration catalyst. The number of Brazilian citizens who reported to tax authorities that they were permanently moving out of the country almost doubled between 2014 and 2016 compared to the previous three years.
However, this kind of mobility is denied to a certain category: Brazilian legal entities. Transferring a company to another country may be of interest or necessary when managing partners change residency or there is an intent to operate in new markets. However, this is not feasible for Brazilian companies. The legislation allows firms to emigrate but does not provide mechanisms for the transfer nor information about clear consequences of the move.
Unfortunately, in order to change domicile and nationality, it is necessary to liquidate the Brazilian company and create a new one overseas, forcing appraisal and distribution of assets to partners, advance maturity of the company’s debts, and causing adverse tax impacts, which could otherwise be avoided.
The former Corporations Law, dated 1940, authorized Brazilian corporations to change nationality upon unanimous consent of their shareholders. The authorization was maintained by the Corporations Law from 1976 currently in force. The Civil Code of 2002 defines nationality by the company’s place of administration and organization/applicable law. It also provides that “There shall be no change of nationality of a Brazilian company without the unanimous consent of its partners”. In this respect it is similar to the law of 1940 and reaffirms partners’ right to transfer the company to another country. The same Code also states that the domicile of legal entities is the place where its administration operates, or the place elected in its bylaws. It should thus suffice to transfer the administration to another country for the company to have domicile and nationality in such country, as long as it fulfilled local rules of organization and that said country allowed the transfer of companies with preservation of their legal personality.
But in practice the Brazilian government makes it unfeasible for partners to exercise their right to transfer the company to another country. The Department of Company Registration and Integration, which disciplines the activities of Brazilian Commercial Registries, is responsible for defining the procedures to be followed, as it does for the transfer of head offices of companies from one state to another within Brazil. However, the Department’s rules are silent regarding the registry of acts relating to the change to another country; hence there is no clear and nationally accepted procedure to formalize it.
The tax administration also makes this movement difficult by not accepting the indication of an establishment domiciled out of Brazil as the new headquarters of Brazilian companies in the National Registry of Legal Entities (CNPJ). The electronic system available does not accept this change, indicating that Brazilian tax authorities do not recognize the transfer of head offices and domicile of Brazilian companies to another country.
Neither are there rules regarding the tax consequences of the emigration of national companies. Given the impossibility of reporting this change in the CNPJ registry, the Brazilian Federal Revenue Service could either (i) refuse the change and continue demanding fulfillment of tax obligations applicable to companies domiciled in Brazil; or (ii) consider that the company has been liquidated, with cancellation of its CNPJ registry and distribution of assets to partners.
In the first scenario, considering that the company would acquire domicile and nationality out of Brazil, henceforth being subject to the tax rules of its new country of domicile, continuing to demand fulfillment of tax obligations in Brazil could lead to double taxation and imposition of charges and fines for their non-fulfillment.
In the second situation, taxes typically levied upon liquidation of companies could be charged, such as Income Tax on capital gains, Income Tax and Tax on Financial Transactions (IOF) due upon liquidation or redemption of financial investments of the company. There would also be a risk of tax authorities deeming the company’s liquidation irregular, with the mere change of the head offices’ address, which could lead to personal liability of administrators for unpaid corporate taxes.
The correct treatment should be to consider the company’s tax periods terminated on the date of its change of domicile to another country and, from then on, in case any income was produced by assets maintained in Brazil, tax it according to the rules applicable to non-Brazilian residents. All this without jeopardizing the company’s legal personality or forcing distribution of assets to partners.
Procedures should be similar to those which exist for Brazilian resident individuals (natural persons) who leave the country with permanent intent: they must file tax returns to the authorities reporting the exit for settlement of accounts with the Federal Revenue Service until the exit date. In case the Brazilian firm was maintained as a branch of a foreign company, any local income/profits attributed to it would be regularly subject to Brazilian corporate taxation.
Transferring Brazilian companies to other countries without their liquidation is compatible with Brazilian law and, for this reason, should not have to face practical obstacles nor cause undesired tax effects.
But the lack of procedural rules to make the transfer feasible and the impossibility to amend the CNPJ registry cause insecurity and hold a company hostage in Brazil, in the opposite direction of other countries’ practices. The restrictions may reveal intent of the government on keeping operations, profits and taxation in Brazil.