Doing Business in Brazil: Understanding Actual Profit and its tax implications

 

The Actual Profit method requires rigorous planning but offers many opportunities. Here is what to consider when investing in companies under this regime

 

By Glória Cunha

 

Selecting the right tax regime is essential for maximizing business profitability. In Brazil, businesses can choose from four primary assessment methods: Actual Profit, Deemed Profit, Arbitrated Profit, and Simplified Tax System (“Simples Nacional”), each with its own rules for tax calculation and varying requirements for ancillary obligations. 

 

• See also: Doing Business in Brazil: learn the pros and cons of each tax regime

 

Among these, the Actual Profit method is often seen as the most complex. However, this regime offers significant advantages in terms of tax planning, such as the ability to offset tax losses and deduct operating expenses. 

Therefore, before investing in Brazilian companies, foreign investors should consider the impact of the actual profit method on their returns and explore opportunities for tax optimization. Here are key factors to keep in mind when investing in companies that operate under this regime.

 

What is Actual Profit? 

Under the Actual Profit scheme, taxable income is assessed based on the business’s accounting profit, which represents the positive financial outcome achieved by a company after accounting for all revenues and deducting expenses incurred during a specific period. 

The legislation mandates this regime in certain situations, such as for companies with high profitability, annual gross sales exceeding BRL 78 million, or those that earn profit, income, or capital gains from abroad.  

Nevertheless, any company, regardless of its size, can choose the actual profit system, and this decision should be a key component of the business's tax strategy.

 

General tax rates

Below are the general rates for the main taxes assessed under the Actual Profit method, applied to the gross revenue earned during the period:

Tax	Applicable rate
IRPJ – Corporate Income Tax	15%
IRPJ additional rate  (applicable to companies with an annual turnover rate exceeding BRL 20,000)	+ 10% on profits exceeding BRL 20,000 per month
CSLL – Social Contribution on Net Income	9%*
PIS – Social Integration Program **	1.65%
COFINS – Contribution for Social Security Financing **	7.6%

*For banks, the CSLL rate is 25%, while for other financial institutions, such as securities dealers, currency exchanges, and credit unions, the rate is 20%.

**These taxes are subject to change following the regulation of the upcoming Tax Reform.

 

Advantages of the Actual Profit Regime

Offsetting tax losses

One of the key advantages of the Actual Profit regime is that it allows companies to offset up to 30% of their adjusted net profit with retained losses from previous years. This helps reduce the tax base for calculating both income tax and social contribution. 

This is particularly beneficial as it allows companies to offset initial or occasional losses – which are often experienced during the early stages of investment by foreign companies in Brazil – against future profits. Consequently, there is a potential reduction in the overall tax burden and an improvement in the company's profit margin over subsequent years.

 

Deduction of operating expenses

Companies operating under the Actual Profit method can deduct expenses that are necessary for maintaining their business activities on a going concern, as long as these expenses are properly documented and directly related to the company's operations, in accordance with Brazilian law.  

Deductible expenses include payroll costs, such as employee salaries and benefits, as well as costs associated with the upkeep and maintenance of equipment, rental payments, and other operational expenses.

 

Accuracy and transparency

The Actual Profit method provides an accurate reflection of a company's financial performance. Additionally, companies that operate under this regime typically adhere more closely to international accounting standards, thus providing foreign investors with a clearer and more transparent financial overview of the company.

 

Points of concern

Rigorous data assessment

The actual profit method demands a high level of rigor in complying with corporate and tax obligations. This requires a robust financial control system and the submission of detailed reports such as the ECD (Digital Accounting Bookkeeping), ECF (Tax Accounting Bookkeeping), and EFD (Digital Tax Bookkeeping). 

Although the complexity of these requirements can lead to increased operational costs, maintaining strict accounting controls enhances investor confidence in the company's governance and financial health. 

 

Transfer pricing

Transfer pricing plays a significant role in determining the actual profit for companies engaged in international operations. The rules are designed to prevent companies from shifting profits to low-tax jurisdictions through transactions between related parties in different countries. 

Companies must adjust the prices of these transactions to reflect market values practiced worldwide, ensuring that the profit margins are in compliance with legal limits.  

It is worth noting that last year, a new transfer pricing regulatory framework was introduced in Brazil, aligning the country's practices with the international standards set by the Organization for Economic Cooperation and Development (OECD). 

• Further reading: New transfer pricing rules signed into law

 

Taxation of foreign income

Companies engaged in international transactions are subject to taxation on profits earned outside Brazil, which affects the calculation of actual profit. Brazil follows the universal taxation method, meaning it taxes global income regardless of whether it is repatriated. Under Brazilian law, profits from foreign subsidiaries and branches are considered taxable income, for the purpose of calculating income tax and social security contributions. 

To mitigate double taxation, companies may offset taxes paid abroad up to the amount of tax owed in Brazil. However, it is crucial to adhere strictly to specific rules and international treaties governing these offsets. 

 

Tax strategy and support for foreign investors

Understanding the factors that influence actual profit is essential for assessing the viability and profitability of business investments in Brazil, ensuring a thorough analysis of a company's financial health. 

To assist in decision-making, Domingues e Pinho Contadores offers comprehensive tax solutions and support for foreign investors looking to enter the Brazilian market. Reach out to us at: dpc@dpc.com.br.