tax according to the Real Profit Regime, which is based on quarterly or annual balance sheets. They may not opt for the Deemed Profit Regime (a simplified system of taxation based on a statutory percentage of gross revenues). Other companies subject to the Real Profit Regime of taxation, irrespective of the revenue level, are the following: ( i ) involved in financial activities (banks, leasing companies and other financial institutions) or factoring; ( ii ) that have earned profits or capital gains arising from foreign interest (income from foreign trade or exported services is not considered foreign interest for these purposes); ( iii ) that enjoy tax benefits (exemption or reduction of income tax); ( iv ) that had made payments under the estimated system during the tax year. (b) Deemed Profit Regime. Under this regime, the calculation of taxes is simplified. First, the company must determine its basis, which corresponds to applying a statutory percentage to its gross revenues (32% for services, including the assignment of rights, and 8% for the sales of goods). The resulting amount is the basis, which is subject to the tax rates. The rates are the same as in the Real Profits Regime, that is: ( i ) IRPJ of 15%, with an additional 10% on the profits that exceed BRL 20,000.00 per month (i.e., profits of BRL 240,000.00 per year are taxed at a 15% rate, and the exceeding amounts are taxed at a combined 25% rate); and ( ii ) CSLL of 9%. Transfer Pricing on Foreign Loans and Thin Capitalization Rules: Until 2023, all foreign loan agreements in Brazil are subject to transfer pricing rules under Law no. 9430/96, according to which the interest paid to related 5.3.

parties is deductible up to an amount which does not exceed the amount corresponding to: (a) the market rate of Brazilian bonds issued abroad in US Dollars, for transactions in US Dollars with fixed rate; (b) the market rate of Brazilian bonds issued abroad in Brazilian Reais, for transactions in Brazilian Reais with fixed rate; or (c) the Libor rate for 6-month deposits in the currency of the corresponding agreement 11 or in US Dollars for agreements signed under a currency for which a specific Libor rate is not available, for other transactions; or The maximum interest rate is increased by a 3.5% spread. Thin capitalization rules impose additional restrictions on the interest paid on loans to related foreign companies. In general, interest paid to foreign related parties is deductible only if, cumulatively: (a) it consists of a necessary expense for the entity; and (b) the amount of the indebtedness with a related company does not exceed twice the amount of the participation of the related entity in the net worth of the Brazilian entity (or twice the overall net worth of the entity if lender does not hold any participation). In any case, the sum of all loans with related parties abroad must not exceed twice the value of the participation of foreign shareholders in the net worth of the Brazilian entity. Therefore, a debt/equity ratio of 2 to 1 must be observed. Said debt/equity ratio is

11 At the moment, Libor rates are only available for deposits in US Dollars, Euros, Pounds Sterling, Swiss Francs and Japanese Yen.

ILN Corporate Group – Establishing a Business Entity Series

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