Dear friends and clients,
We hope everyone is well, in spite of the Pandemic. We continue to try to bring you interesting articles on the legal world.
The first topic of this edition deals with “The LGPD and labour relations in Brazil”, which brings a reflection on how companies should adapt as quickly as possible to avoid the formation of administrative and judicial liabilities, as well as the exposure of their name, brand and reputation.
The article on “Alternatives for restructuring of intercompany debts of Brazilian subsidiaries of foreign companies as a result of foreign exchange variation” helps to understand the mechanisms allowed by Brazilian law that can be used for debt restructuring.
In the article on “Cost Sharing with Company Domiciled Abroad: Requirements and Effectiveness” we hope to alert you about the mechanism that allows cooperation within the group without tax costs.
We wish everyone health, as well as a lot of courage and perseverance!
Good reading! The Stüssi-Neves team is at your disposal for any further explanation you may require.
With kind regards,
Gustavo Stüssi Neves
Non-observance of the LGPD (General Data Protection Law) will give rise to administrative sanctions imposed by the National Data Protection Authority as from August 2021, as determined by article 20 of Law 14.010, which modified the text of article 65 of Law 13.079.
In spite of this, many authorities are already imposing or seeking to impose penalties for failure to comply with the LGPD and are taking court action in this respect. Moreover, there is nothing to prevent data subjects from claiming compensation in court, as well as coercive measures to enforce compliance with the LGPD.
In the context of labour relations, the LGPD is firmly present in the three stages (pre-contractual, contractual and post-contractual), although there are no specific regulations in this respect. Apart from the direct relationship between the company, the candidates for job vacancies offered and its own employees, the LGPD is also present in relations with the employees of outsourced companies.
For the reasons set out in the preceding paragraph, companies must adapt as soon as possible, creating procedures and policies, adjusting their work contracts and agreements for services with independent contractors, training and instructing their work force regarding the law and the care necessary in the treatment of data, thereby avoiding the formation of administrative and judicial liability and the exposure of their name, brand and reputation.
At the pre-contract stage, companies will have to adjust their recruitment and selection processes, deciding whether resumes not used are to be discarded or kept in their database for future vacancies, obtaining, in the latter case, the express consent of the candidate to do so. The companies must also consider that the recruitment and selection processes may be subject to investigation by the competent authorities and/or judicial discussion by these same persons or by the candidate himself, and, in this respect, the treatment of candidates’ data may constitute evidence for their defence, the regular exercise of rights.
In the course of the employment relationship, the applicability of the LGPD is vast, since the employer is obliged to provide personal as well as sensitive data of its employees in order to comply with legal obligations, such as for the E-social, for the DCTFWeb, for the CAT, for the obligatory Occupational Health and Safety Programmes, for the labour inspectors of the Special Secretariat of Social Security and Labour and of the Federal Revenue, unions and class entities, among others.
The employer uses the data of its employees, also, in order to comply with contractual obligations, such as for the provision of benefits, health and life insurance, agreements in general with other companies etc., constituting, therefore, the regular exercise of rights, which strictly exempts it from obtaining the express consent of the employee, provided of course that such benefits are in the latter’s interests or result from a regulatory provision.
The employer may also be obliged to use such data in administrative or judicial proceedings, as determined by the supervisory body or judge, in which case authorization to supply such information from the employee is not required, since this undoubtedly constitutes a regular exercise of a right.
In the event of an occupational accident or health problems that justify the adoption of measures by the employer for the protection of the life and physical safety of the data subject, in this case, the employee, the company will also have to use his data.
It is essential to mention, if only briefly, the matter of the employee’s consent, since a trend of opinion has already been formed on this point, not only in Brazil, but also abroad, to the effect that it is inapplicable, as a rule, to employment relationships, given the worker’s situation of “hypo-sufficiency” (the weaker party). On this subject, we will express our views in further detail in a future article.
On termination of the employment, the employer should, strictly speaking, eliminate the personal data of its employee, since their purpose has been achieved or they are no longer necessary. However, considering that many of these data may be subject to analysis by the Brazilian authorities and/or constitute evidence in legal proceedings that may be brought against the company, including by the employee himself, they may be stored, for compliance with legal obligations or the regular exercise of rights, for the period in which they may be required; these are situations that, we repeat, do not require consent of the data subject.
The retention period could, in principle, be standardized according to the two-year and five-year limitation periods that apply to the employment relationship. However, there are situations that may exceed these periods, such as cases of accidents at work (including professional and occupational diseases) and death of a worker leaving minor heirs, matters which should be considered when the employer sets the parameters for the storage and destruction of data.
These are the initial observations of our labour team regarding the impact of the LGPD on labour relations. We will continue to produce material on the subject, as there will be many challenges to be faced in the near future.
We are available for any clarification that may be necessary.
Maria Lúcia Menezes Gadotti
Partner in Labour Law Area – São Paulo
The continued devaluation of the Real has increased the total indebtedness of Brazilian subsidiaries of foreign groups that incurred debts in foreign currency, particularly in relation to the U.S. dollar and the Euro, and these subsidiaries are now seeking ways of restructuring the debts to their parent companies. Such devaluation may cause very serious impacts, affecting financial results and possibly making the debts unpayable.
It is a fact that there has been a significant positive variation of the U.S. dollar in relation to the Real in the last few years. By way of example, the average annual dollar/real rate in 2015 was approximately R$ 3,34 and the average partial annual rate for 2020 calculated up to July 31, 2020 was R$ 4,98, the rate today being more than R$ 5,60. In view of this scenario, the need has arisen to discover what action permissible under Brazilian law may be taken to restructure intercompany foreign currency debts, in order to reduce risks and negative impacts related to the exchange variation for the Brazilian subsidiaries.
For an analysis of such action, we have separated the debts, by their nature, into three groups: loans, importations and other types of debt.
As far as the first group is concerned, namely foreign currency loans, the principal amount and interest may be converted into a direct investment, whereby the total amount due will be converted into quotas or shares in the Brazilian debtor company, by establishment or increase of the creditor’s equity interest in the said company. However, in relation to this group it must be borne in mind that loans converted into direct investment in a period of less than 180 days from the date of entry of the funds will be subject to IOF (tax on financial operations) at the rate of 6%, plus penalty and interest from the date of entry of the funds into the country, whereas loans made and converted over longer periods will benefit from a zero rate for the same operation, pursuant to article 15-B, items XI and XII of Decree 6.306/07.
It is important to note that for any symbolic foreign exchange operation, whether of the type now referred to or any other described in the legislation such as those below, the rate of IOF on the exchange is also reduced to zero rather than the usual 0.38%, in accordance with article 15-B, item XVIII of Decree 6.306/07.
It must also be pointed out that the total amount of interest, if converted into capital, will be subject to the withholding income tax at the rate of 15%, since the conversion is regarded as being a form of payment of the obligation.
1 Figure calculated in accordance with the U.S. Dollar Free Exchange Rate (sale), on a daily basis, obtained from the SGS – Temporal Series Management System of the Central Bank of Brazil.
Also in relation to loans, if the conversion into capital is not a feasible alternative, but it is intended even so to avoid the risk of the foreign exchange variation, there is the possibility of switching to Reais the foreign currency applicable to the loan.
Another operation that merits attention for the purpose of restructuring debts in foreign currency involves importations, which may be converted into a loan, preferably with a change of currency into Reais, since the intention is to eliminate the risk of foreign exchange variation, or into direct investment.
For conversion of debts incurred on importation into a loan in local currency, it is necessary for the creditor formally to express its intention of doing so by means of a declaration, stating that the amount of the loan will be in Reais, to be calculated at the moment of the simultaneous exchange operations. Special attention should be paid to the incidence of IOF, the ideal solution being that the loan in question stipulate a repayment term of at least 181 days from the conversion, in which case a zero rate will be applied.
Conversion of the importation into direct investment may take place at any time by means of a declaration by the creditor and acceptance by the debtor, resulting in simultaneous symbolic foreign exchange operations.
As regards other foreign debts of an unspecified nature, these may be converted into a loan or direct investment, in the same way as importations, since any obligation that involves payment abroad may be converted, the only requirement being a formal statement by the creditor to that effect. However, it should be noted that some operations involving certain debts may give rise to the incidence of taxes as a result of their nature and must be considered specifically for the purpose of conversion. In this connection it must always be borne in mind that the exchange on sale of foreign currency on the conversion, the first leg of the symbolic operation, gives rise to the same effect as in the case of actual repayment.
It should be mentioned that the figures resulting from the conversions will be calculated in accordance with the exchange rates on the date of the symbolic operations for the conversion rather than the historic value of the debts in any of the cases above.
In relation to debts that are not capable of registration under the foreign exchange legislation, and cannot therefore be the subject-matter of a symbolic exchange operation for conversion, in accordance with Law no. 11.371/06, there is still the possibility of conversion into direct investment with the registration of so-called “contaminated” capital, which, although feasible, must be considered with great care.
Finally, before carrying out any restructuring of foreign currency debts, it is necessary to confirm that the information lodged with the Central Bank of Brazil is up to date, and also to consider from the group structural viewpoint the best option to be adopted.
Deborah Grasmann e Adolpho Smith
Associate lawyer and Partner in Company Law Area – São Paulo
email@example.com e firstname.lastname@example.org
1. Characterization of shared services as reimbursement
The payment of costs and expenses shared between companies of the same economic group, with headquarters in different countries, may be treated as a mere reimbursement without the incidence of a high tax burden on payment or receipt. However, in order for such costs and expenses to be characterized in Brazil as a reimbursement, certain requirements must be complied with.
First of all, to be treated as a reimbursement the costs and expenses must relate to supporting activities rather than core activities of the service provider. Thus, services that are included in the corporate purpose of the service provider may not be shared, and consequently the costs and expenses thereof cannot be treated as a reimbursement.
For this reason, it is only possible to recognize as a reimbursement of shared costs and expenses those actually incurred by the service provider. It is therefore not permitted to add any amount or profit margin to the costs or expenses shared and reimbursed.
Moreover, in order for the costs and expenses to be recognized as a reimbursement, it must be shown unequivocally that the services shared are of mutual benefit to the companies that participate in the agreement. Accordingly, all the companies must benefit from the services shared, including those performing the services.
With a view to proving compliance with the minimum conditions required, it is necessary to have, apart from other documents, a formal contract between the companies of the group, showing the total costs of each service incurred and shared, and also the reasonable and objective criteria used for the division.
The minimum requirements of the said contract were set out in Cosit Answer to Consultation no. 8/12 of which, in spite of its technicality, it is worth citing the following:
a) the division of the costs and risks inherent to the development, production or obtaining of goods, services or rights must be detailed;
b) the contribution of each company must be consistent with the individual benefits expected or actually received;
c) the identification of the specific benefit to each company of the group must be clear;
d) there must be an agreement for reimbursement, meaning the refund of costs relating to the effort or sacrifice incurred in the carrying out of an activity, without any additional profit;
e) the collective nature of the advantage offered to all the companies of the group must be express;
f) there must be a provision for remuneration of the activities, irrespective of their actual use, it being sufficient to “put the activities at the disposal” of the other companies of the group;
g) the conditions must be such that any company, in the same circumstances, would be interested in contracting.
In short, the contract must state the total cost or expense that benefits the signatory companies; the criteria for its division, each company necessarily defraying only the benefits actually expected or gained, with the possibility of their identification; and further it must state the manner in which reimbursement of the cost or expense will be made, with the supposition that it will be attractive even for independent companies.
2. Taxes that may be levied if reimbursement is not characterized and provision of services is recognized
Although the amounts classified as reimbursement of costs and expenses do not reflect any financial gain, which is sufficient to justify the non-incidence of taxation, the Brazilian Federal Revenue has still not adopted a firm position to this effect.
2.1. Payments abroad
Generally speaking, payments, credits or remittances abroad relating to the provision of services are subject to Withholding Income Tax (IRRF) of 15%, the Contribution on Economic Activities (CIDE) of 10%, the Contribution for the Financing of Social Security payable by the Importer of Foreign Goods or Services from Abroad (COFINS-Importation) of 7.6% and the Contribution for the Social Integration Programme and Civil Servants’ Investment Programme due on the Importation of Foreign Products or Services (PIS/PASEP-Importation) of 1.65%. The Tax on Financial Operations (IOF) of 0.38% is due in any case. The Tax on Services (ISS), with the maximum rate of 5%, may also be demanded by the municipality.
The IRRF paid in Brazil may be taken as a credit abroad if there exists a double taxation convention with the country in question, or, at least, reciprocity of treatment.
It is worth mentioning that, in the event of a remittance of funds abroad in payment of services, the financial institutions involved are also responsible for the operation, for which reason they tend to confirm the need to pay the taxes due on the operation in order to avoid any risks.
2.2. Cash receipts from abroad
Payments received by the Brazilian company for services shared may be regarded as corresponding to services exported. In this case, the funds received from companies abroad, in the form of foreign currency, would not be subject to PIS and COFINS on the amount invoiced. In any case, if they are recognized as remuneration for services rendered, they would be subject to IRPJ and CSLL. The ISS on the services may also be demanded by the municipality in question.
3. Possible risks and means for their reduction/elimination
As already stated, the Brazilian Federal Revenue has not confirmed its attitude regarding the non-taxation of payments relating to costs and expenses shared and reimbursed. As a result, in operations involving remittances abroad, the financial institutions normally require to see proof of payment of taxes.
If it is intended to avoid paying tax, and with a view to reducing, and even eliminating, possible risks, it is important that the operations be properly formalized. It must be possible to show, by producing solid evidence, that the funds received from, or paid to, the related party refer to the recovery of expenses incurred for the benefit of another, so as not to generate income/earnings for the recipient.
The contracts signed must contain details sufficient to prove compliance with the requirements necessary for characterization of the reimbursement, with the resulting non-taxation, and all the supporting documentation must be retained.
An alternative, in order to guarantee the position of the Brazilian Federal Revenue, in principle and preferably in favour of the non-incidence of tax, is the submission of a formal consultation with a view to confirming the interpretation applicable to the case.
Specifically for operations involving remittances abroad of sums relating to the costs and expenses shared, it is possible that, even on production of the contract signed between the companies of the group, together with all supporting documentation, and further even presenting the formal consultation to the public authorities, the financial institution may not agree to make the remittance without payment of the tax.
In this event, a declaration may also be produced to the financial institution, in which the company making the remittance assumes the obligation to inform the institution immediately of the result of the formal consultation, as soon as a reply is received from the Federal Revenue, and also to comply with the result thereof, if necessary, with payment of tax on the operation.
We consider that, provided the above requirements are met, the risks may be reduced or even eliminated.
We are available to assist persons interested in any issues involving this matter.
Patrícia Giacomin Pádua
Partner in the Tax Area – São Pauloo