Brazil Statutory Corporate Tax Rate: 34%

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1 Overview of Brazilian Taxation Brazil Statutory Corporate Tax Rate: 34% Tauil & Chequer in association with Mayer Brown LLP Roberta Caneca, Partner Ivan Tauil Rodrigues, Partner São Paulo Rio de Janeiro

2 Investment in Brazil Investments in Brazilian companies The investment must be registered before Central Bank according to Law No. 4,131/62 (4,131 Investments and 4,131 Investor) Applicable to acquisition or subscription of equity in Brazilian companies, normally non listed companies. The registry of the investment is required to make possible the remittance of profits and the repatriation of the principal. Most common types of corporations in Brazil: limited liability companies (sociedades limitadas) and joint stock companies (sociedades anônimas)

3 Summary of Financing Alternatives for Brazilian Operations Payments to Non-tax haven All Equity Dividends are exempt from withholding tax; however, there is no corporate income tax deduction. Possible to remunerate shareholders with deemed interest on net equity, based on long-term interest rate. Interest on net equity is deductible up to 50% of the earnings before taxes, and subject to 15% withholding income tax. Equity and Related Company Debt Interest is deductible; however, it is limited by Brazilian Transfer Pricing Rules and Thin Capitalization Rules. Subject to 15% withholding tax. Tax haven Same treatment as to dividends. Interest on net equity is subject to 25% withholding tax. Interest is deductible, but limited to interest calculated on 30% of the Brazilian company s net equity. Subject to 25% withholding tax. IOF/FX Tax 0.38% on capital contribution 0% dividend and interest on equity payments. 0.38% on capital contribution 0% dividend and interest on equity payment. 0% to 6% on loans and interest payments.

4 Related company Debt (cont.) Transfer Pricing Deductibility limited to interest paid at LIBOR + 3% rate, if the Loan Agreement is not registered before the Brazilian Central Bank. If the loan agreement is registered before the Brazilian Central Bank, the interests foreseen in the agreement are fully deductible. Thin Capitalization Rules Interest expenses arising from any financing arrangement executed with a related party non-resident in Brazil are only deductible if it does not exceed twice (debt: equity ratio 2:1) of the its participation in the net equity of the Brazilian borrower, A second test also needs to be performed including the total amount of debts with any related party non-resident in Brazil. If under either a debt or equity test a 2:1 ratio is exceeded, the portion of interest related to the excess debt amount will not be deductible for Brazilian income tax purposes Interest expense deriving from a financing arrangement executed with a contracting party established in a tax haven or benefiting from a privileged tax regime, irrespective of whether related or not to the Brazilian borrower, will only be deductible if the debt: equity ratio of the Brazilian entity s net equity does not exceed 0.3:1. Brazilian Federal Revenue Office blacklisted U.S. LLCs owned by non-residents not subject to federal income tax in the U.S. They are now treated as privileged tax regimes and, therefore, deductibility of interest for investments made by such LLCs are limited to 30% of the Brazilian company s net equity.

5 Tax Considerations on Exit Capital Gain The positive difference between the cost of acquisition of the shares/quotas in the BrazCo and the amounts earned by the Investor upon the disposal is subject to WHT, at a 15% rate. If the Seller happens to be domiciled in a tax haven jurisdiction, the WHT rate is 25%. As a general rule, the cost of acquisition is the cost registered before the Central Bank of Brazil. The WHT also apply where the seller and purchaser of the shares/quotas in the BrazCo are resident overseas, and the payment is not soruced in Brazil. Discussion whether the capital gain should be calculated in Reais or Foreign Currency.

6 WHT on other types of outbound payments sourced in Brazil Royalty Resident in the U.S. 15% (+ 10% surtax borne by the Brazilian payor) Resident of a Low Tax- Jurisdiction 25% Non-technical Service Fees* 25% 25% Technical Service Fees* 15% (+ 10% surtax borne by the Brazilian payor) 25% Lease 15% 15% International Hedging 0% 25% Interest and commission on export financing Charter of Vessels and Aircrafts 0% 0% 0% 25% *WHT applies even when the service is fully provided overseas, but only the payment is sourced in Brazil. Transfer pricing rules apply.

7 Other Tax Considerations No Partnerships No tax consolidation No Tax Treaty to avoid Double Taxation with the U.S.

8 Investments Through Brazilian Private Equity Fund (FIP) FIP Characteristics Not a legal entity, but should be eligible for U.S. check-the-box election Can only invest in shares of an S.A. (corporation) FIP can only have one class of interests Required that FIP participate in target management

9 Tax Considerations When Using a FIP Benefits Zero tax rate on any income distributed by the FIP Exemption of income tax on capital gains obtained on the sale of FIP quotas FIP and 2,689 Investor are not taxed on sale of portfolio company or liquidation of FIP 0 % FX tax on entrance 40% limitation Separate funds (each with less than 40%) Divide single fund into alternative investment vehicles Necessary to demonstrate that each vehicle holds funds of different investors Demonstration of compliance with 40% limit

10 Brazilian Tax Considerations: Combine FIP with Brazilian Holdco Possible to create HoldCo in order to buy shares of BrazCo Step-up of Goodwill U.S. Brazil Goodwill amortization after upstream merger (IMPORTANT: business purpose is strongly advisable for the transaction not to be challenged by tax authorities in a substance over form approach)

11 Other Brazilian Taxes Revenue Based Taxes PIS* - Social Contribution to the Integration Program COFINS* Social Contribution to Finance Social Security Service Tax Transaction Based Taxes Import Tax IPI - Excise Tax ICMS State VAT * Similar to VAT. Also applies to the importation of goods and services