importation rules follow WTO standards, including in what respects valuation of goods. (d) The IPI is an excise tax charged on a value- added basis and is imposed on the importation of goods, on their subsequent sale and on the sale of products arising from industrial processes. The taxable basis is the CIF value of the goods and the Import Duty in case of importation, or the value of the transaction on subsequent sales. Rates are also provided for by a schedule based on the Harmonized System, ranging from 0% to 45% (as to the Import Duty, it follows the “essentiality” principle). (e) The ICMS is a State tax charged on a value- added basis upon importation and sale of goods. On transactions taking place within the boundaries of any given State (importation and transactions within the State), the tax is entirely due to such State. Sales across State lines impose the split of the tax between the State of origin and the State of destination. The general mechanism for this split is the determination of an interstate rate (4%, 7% or 12%) that is lower than the regular rate for intrastate transactions (usually 18%), allowing the destination State to collect the difference on the subsequent sales or the balance derived from the difference between the interstate and the intrastate rates when the acquirer is the end-user of the product (i.e., there is no subsequent transaction with the good) 9 . 9 Many products or transactions are subject to what is called the ICMS Substitution Regime (ICMS-ST), under which one participant in the production and consumption chain (usually the manufacturer or importer) anticipates the payment of the tax due across the entire chain, based on certain statutory presumed profit margins. After the entity appointed by the law as

(f) The ISS (Municipal Tax on Service) is due upon the importation and the rendering of services, and its rates vary from 2% to 5%. (g) Payments abroad are usually subject to a 15% withholding income tax, including technical services 10 , but are aggravated to 25% if paid to a beneficiary domicile in a tax haven. Non-technical services are also subject to a 25% rate. Other taxes may be levied depending on the nature of the remittance. Dividends are tax free in Brazil, irrespective of the domicile of the beneficiary. (h) The most relevant labor-related taxes are Social Security Contribution of 20% on payroll and Employment Security Fund – FGTS of 8%, also on payroll. 5.2. Tax Regimes: There are two basic regimes for calculation and payment of the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL), namely the “Real Profit Regime” and the “Deemed Profit Regime”. (a) Real Profit Regime. Companies with total gross revenues greater than BRL 78,000,000.00 per year must assess income the “substitute taxpayer” makes payment of the tax, all subsequent transactions within the State boundaries are exempt from it. In the event of subsequent interstate transactions, the ICMS must be paid again by the seller and the amounts previously paid by the substitute taxpayer and ultimately collected from the seller become a credit to the seller. 10 The definition of “technical services” is very broad, encompassing consultancy services, managerial assistance, or any other provision of service in which technical knowledge in general are applied. In practice, since all services are in certain level “technical”, the 25% rate is seldom applicable.

ILN Corporate Group – Establishing a Business Entity Series

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