Except for land, which is not depreciable, the depreciation incurred on property, plant and equipment is an allowable deduction.
Fixed assets may be depreciated using the straight line method at rates provided by the Brazilian tax authorities. The following are some of the annual depreciation rates:
- Real estate assets: 4%
- Machinery and equipment: 10%
- Vehicles: 20%
- Computer hardware and software: 20%
Companies that operate two work shifts per day may depreciate machinery and equipment at 1.5 times the normal rate. If the company operates three shifts, it may double the normal rate.
For accounting purposes, companies adopting International Financial Reporting Standards (IFRS) may calculate depreciation at different rates (taking into account IFRS criteria, which can affect, in addition to depreciation rates, inventory and other items). However, for tax purposes, these accounting differences are tax neutral under the transitional tax regime.
Amortization of goodwill that arises as a result of accounting for investments in subsidiary and associated entities by the equity pick-up method is deferred for taxation purposes until the related investment has been realized (e.g. sold, disposed of or otherwise alienated). However, in certain cases, goodwill paid upon the acquisition of the shares or quotas of a permanent investment may be amortized before this realization occurs (e.g. following a merger or a spin-off). It is important to note that,although still applicable for tax purposes (under the Transitional Tax Regime – RTT and Provisional Measure 627), the amortization of goodwill is no longer accepted under Brazil’s new accounting practices.
Amortization of patents, trademarks and copyright, based on their legal limited life, is a deductible expense within certain specified limits.
As a general rule, and under the RTT, formation, start-up, pre-operating and expansion expenses may be deferred and amortized for tax purposes on a straight-line basis over a period of not less than five years, beginning the month in which the business starts operating.