Taxation of royalties in Brazil: key points and challenges
Taxation of royalties involves complex rules and significant implications for businesses operating in Brazil. The term “royalties” covers activities with distinct legal classifications, which may include the assignment or licensing of rights and, in some cases, technology transfer. For example, a copyright license falls under this category. Therefore, contracts and invoices must clearly describe and value each item. Otherwise, combining them may result in a more burdensome tax treatment.
Challenging legal qualification
In practice, defining what constitutes “royalties” is not always straightforward. For instance, does “know-how” qualify as the licensing of rights, or is it better characterized as a service? Moreover, what differentiates technical assistance from technical services, and how do they diverge from non-technical services? These distinctions directly affect the applicable taxation.
Taxation on overseas remittances
Additionally, royalty payments abroad may trigger several Brazilian taxes, including IRRF (Income Tax), CIDE, and PIS/COFINS-Importation. With regard to the ISS (Service Tax), it may apply to assignments of trademark rights, although the matter is still under review by the Supreme Court (STF Topic 1,210). Nevertheless, past decisions, such as those concerning franchise and software licensing agreements, indicate the Court’s tendency to uphold municipal taxation.
Global agreements and tax treaties
Depending on the country where the recipient is located, international treaties may exempt or limit IRRF in Brazil. For example, technical services may sometimes be treated under Article 12 (royalties) or, in other cases, under Article 7 (corporate profits). Consequently, companies must analyze treaty provisions carefully to avoid double taxation.
Tax deductibility rules
Another important point of the taxation of royalties concerns deductibility. Expenses related to royalties paid abroad are deductible only if essential for maintaining possession, use, or enjoyment of the underlying asset or right. However, recent amendments to the transfer pricing law, which now covers royalties, have changed certain restrictions. As a result, registering contracts with BACEN and INPI is no longer required, and the previous quantitative limit of 5% of gross revenue has been abolished.
