A new system for pricing royalties and impacts on Industrial Property agreements

Provisional Measure 1,152, published on December 29th, 2022, introduces a new legal framework for transfer pricing in Brazil in relation to transactions involving intangible assets. It acts in conjunction with Law 14,286/2021, in force since December 30th, 2022, which extinguished the need for prior registration of technology agreements at the Brazilian Patent and Trademark Office (BPTO), as well as registration with the Central Bank of Brazil, for the purposes of remittance of royalties abroad. Prior registration of agreements at the BPTO remains mandatory for tax purposes, that is, for the characterization of operating expenses and deduction in the calculation of taxable income. Also, Law 14,286/2021 extinguished the ceiling  of royalties to be remitted abroad, in operations carried out between related companies, such as parent and subsidiary. Until the entry into force of the new law, payments abroad obeyed the tax deductibility limit, established by Ordinance 436/58 of the Ministry of Economy.

Due to the enforcement of Provisional Measure 1,152 (PM 1,152), the legislation on Corporate Income Tax (IRPJ in Portuguese) and Social Contribution on Net Profits (CSLL in Portuguese) is amended, aiming to bring the Brazilian system of transfer pricing closer to international practice. Based on the Transfer Pricing Guidelines for Multinational Companies and Tax Administrations of the Organization for Economic Cooperation and Development, PM 1,152 is intended to determine the basis for calculating IRPJ and CSLL in transactions carried out by legal entities domiciled in Brazil with related parties abroad. Such transactions, as clarified by the provisional measure itself, can be carried out directly or indirectly, covering contracts or arrangements in any form and series of transactions. As opposed to the previous model, the new system introduces a broader scope, encompassing any commercial or financial relationship between related parties, including those involving intangible assets, which are also subject to specific guidelines in the PM.

The provision measure expressly adopts the arm’s length principle, according to which the terms and conditions of a controlled transaction will be established in accordance with those that would be established between unrelated parties in comparable transactions. The applicability of this principle to transactions involving intangibles is reinforced in the section on specific provisions involving transactions with intangibles. For the purposes of the provisional measure, the characterization of an asset as an intangible asset does not depend on the possibility of registration or legal protection of the asset or its recognition as an intangible asset for accounting purposes.

The document also introduces the transfer pricing rules for specific determinations on cost-sharing contracts, which include technology partnership contracts. The devices focus on identifying the participants in a cost-sharing contract, determining the value of the contributions provided by the parties to the contract, as well as the compensation that must be made by the other parties.

The proposal for Provisional Measure 1,152 aims to eliminate barriers that harm trade in Brazil, such as double taxation, thus allowing greater integration between the Brazilian and international markets. The new rule will come into effect on January 1st, 2024. However, the taxpayer may opt for its application for the calendar year 2023. The form, terms, and conditions for this option will be established by the Special Secretariat of the Federal Revenue of Brazil from the Ministry of Economy.

The National Congress has a period of 120 days to convert the provisional measure into law. If the conversion does not occur, Congress must issue a legislative decree disciplining the legal relationships resulting from the publication of the PM.

We will continue to monitor the discussion of the topic in the National Congress and will return with any news.

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