On July 21, 2015, a new Brazilian law, Provisional Measure nº 685, went into effect in Brazil. The law created the Program to Reduce Tax Litigation – PRORELIT.
PRORELIT allows taxpayers to pay any tax debts subject to an administrative or judicial hearing using credits earned from certain financial losses. Such losses must have accrued by December 31, 2013, and they must have been declared by June 30, 2015.
After using their own credits, taxpayers can use credits that belong to others. For example, taxpayers can use credits that belong to directly or indirectly controlling and controlled entities, as well as entities directly or indirectly controlled by the same company.
Any debts arising from waivers of appeals, administrative appeals and lawsuits that were part of a previous installment payment program are not covered by PRORELIT.
Any taxpayer looking to take advantage of the benefits offered by PRORELIT must act by September 30, 2015. Even if you meet the deadline, there are certain pre-established conditions that first must be met. For example, 43% of the consolidated debt must be paid in kind; only the remaining balance can be paid with the use of tax credits from losses.
In addition, Article 7 of PRORELIT sets forth exceptions to the program. These exceptions, which include certain unusual financial or legal transactions, prevent taxpayers from taking advantage of the benefits set forth by PRORELIT.
If for any reason the Brazilian Federal Revenue Service does not approve the deductions, then the taxpayer will have 30 days to pay the taxes in full. Fines will also be imposed for any taxpayer who seeks to claim tax deductions that are fraudulent.
Tax law in Brazil is complex and the regulations change daily. For legal advice about PRORELIT or any tax matter in Brazil, we strongly encourage you to contact local counsel.