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4.2. Domestic PE of a Foreign Entity

There is no definition of a permanent establishment under the Brazilian law.A foreign entity may not pursue a business in Brazil, whether directly or through a branch, agency or representative office, without obtaining the prior approval of the Federal government. Once approval is granted (in what is usually a cumbersome process), the branch, agency or PE is taxable in Brazil on its worldwide income. In contrast, a foreign person deriving income from Brazilian sources without a presence in Brazil is subject to final withholding taxes.

Trade or Business without Formal Presence

As mentioned above, a foreign person desiring to conduct business in Brazil whether directly or through a branch, agency or representative office, must obtain the prior approval of the federal government. In that case, the formally registered business presence will attract corporate tax in Brazil, much in the same way as a resident company.

However, a Brazilian business presence may also theoretically be deemed to exist where a non-resident person did not formally register a branch, agency or representative office in Brazil, but is found to conduct business in the country. This can be the case under one of two tests, as follows:

Trade or Business Test

The tax authorities are empowered to assess to tax any person found to be carrying out a trade or business without the proper formal registration requirements. Whilst this is meant foremost to tackle domestic “informal” businesses, it may be resorted to by the tax authorities to determine the existence of taxable presence for a foreign person, where the person, whilst not formally registered in Brazil, is found to be conducting a regular trade or business in the country. In such cases, the tax authorities need to determine the existence of a place of business, but such place need not be fixed as long as the tax authorities can evidence that a trade or business is regularly carried out in Brazil. To this end, the law seems to empower the tax authorities to consider that any facility available to the foreign person (such as, for example, a hotel room) or a place where goods or services are regularly supplies, is a constitutive of a fixed place of business in Brazil.

Where such a determination is made, the tax authorities are empowered to assess the business to corporate tax based on the accounting records, if these are regularly kept and are found to be credible, or on a reasonable presumptive basis otherwise.

The law does not define the terms “trade or business”. It is assumed that any business activity regularly carried out for profit so qualifies. Nevertheless, a foreign person carrying out one of the following activities will generally not be deemed to have a business presence constitutive of a PE in Brazil:

  • The trading of securities, commodities and derivatives through a local broker (but the income and gains so derived may be subject to withholding tax in Brazil);
  • The local supply of services other than through a prolonged presence by the person or his employees in Brazil (but the income so derived may be subject to withholding tax in Brazil).

Agency Test

A foreign person may also be found to have a business presence (equivalent to a PE) in Brazil if the person is found to regularly carry out business in the country through a local agent. In order to be so determined, the local agent must found to conclude sales on behalf of, and to have the power to bind the foreign person.

Note that a local person whose activities are limited to certain preparatory activities, such as purchasing merchandize or supplying price lists, will generally not be deemed to conclude sales on behalf of, or to bind the foreign principal. Also, the fact that the foreign person controls the capital of the local agent is not, by and in itself, proof that the local agent is authorized to conclude sales or bind the foreign controlling person.

Where an agent's authority is limited to the purchase of goods or merchandise for a foreign business in Brazil, or where the agent's authority is limited to activities such as marketing, researching potential customers and the provision of price lists, no PE should arise. Further, a controlling interest of a foreign entity in the business where the local agent is employed does not imply binding powers, according to the Superior Tax Court:

There must be proof, for the purposes of an assignment of income, that the agent in Brazil has authority to commercially bind the foreign entity with a local buyer. The fact that a foreign entity holds an interest equivalent to 99.99% of the capital of the agent does not imply the granting of such authority.

PE under Brazilian Tax Treaties

All tax treaties concluded by Brazil are largely based on the OECD Model, thus, where their provisions apply, the term “permanent establishment” includes especially a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. In contrast to the OECD Model, however, most Brazilian tax treaties deem a building site or construction or installation project or supervisory activities connected there withto constitute a permanent establishment if they last for more than three months (instead of the 12-month test under the OECD MC).