Brazilian court rules that Oracle subsidiary may deduct outbound royalty payments

By Francisco Lisboa Moreira, Tax Partner at Bocater Advogados, São Paulo

Brazil’s highest administrative tax court on December 3 ruled that Oracle’s Brazilian subsidiary can deduct royalties paid to foreign related parties who have indirect ownership interests in the payor (share or quota holder) for the commercialization and distribution of software.

The decision of the Superior Chamber of the CARF, in Oracle, (case number 19515.721301/2015-93, Rapporteur Lívia di Carli Germano) breaks from the Court’s longstanding pronouncements in this area.

Brazil’s tax legislation imposes strict limits on the amount of tax deductions that can be taken for payments made to a company’s owners, whether individuals, quota holders, or shareholders (fixed percentages).

The Superior Chambers’ understanding has always been that the intent of Brazil’s tax law, going back to Law n. 4.5061964, is that royalty payments to a direct interest controller of the payor are not deductible.

We believe that the Oracle decision was influenced by the recent Consultation Solution n. 182/2019 (Dated May 31, 2019), issued by Receita Federal do Brasil (RFB), answering a taxpayers’ consultation.

In this guidance, the tax authority affirms that, for applying the restriction of deductibility of royalty payments, the terminology “quota holders (or shareholders)” in art. 71, item d, of Law 4.506/1964, is to be interpreted as to apply only to direct ownership.

The Brazilian tax authority reasons that “a royalty payment to the direct quota (or shareholders) does not make sense, as it is not right to make a payment to the self, but only to third parties, as a remuneration for the use, fruition or exploitation of rights”.

The Oracle decision demonstrates the evolution of Brazil’s understanding of this subject – let’s remember that the royalties legislation was passed in 1964 and is thus much older than Brazil’s 1996 transfer pricing rules.

Brazil’s transfer pricing legislation, Law 9.430/1996, in art. 18, paragraph 9, expressly mentions that the transfer pricing rules for outbound royalty payments are not affected by the transfer pricing legislation.

This Wednesday, another joint meeting between OECD and the Brazilian Receita Federal Technicians will take place in Brasilia.

The meeting will mark the launch of the joint OECD-RFB Report “Transfer Pricing in Brazil: Towards Convergence with the OECD Standard.”

We will attend this important meeting and report on the proceedings.