Offshore companies: monthly accounting follow-up avoids fines and penalties

Several Brazilians opted for the incorporation of an offshore company over the last decades as a way of asset protection, succession or fiscal planning.

The advent of Special Regime for Exchange and Tax Regulation (RERCT) allowed the regularization of assets held abroad and not yet stated to the Brazilian tax authorities, the number of offshore companies reported to Federal Revenue (RFB) and the Central Bank of Brazil (Bacen) increased exponentially.

Hence, compliance with obligations in Brazil has become more complex and we must be careful not to perform operations that result in unplanned costs or moratorium penalties in the collection of any taxes due in Brazil.

Use of resources by a Brazilian shareholder resident can be taxed

It is common the shareholder residing in Brazil confuse the use of offshore company resources. The shareholder need to keep in mind that, once investing in the company, he or she becomes the sole owner of its shares, and the invested capital (money) becomes the property of the offshore company.

In other words, in order to the shareholder enjoy the invested capital, he or she must withdraw funds from the company, either through a profit sharing or through capital decrease. There are situations in which the shareholder registers an investment in the offshore company combined with a loan granted to the company and, in such cases, the offshore company may withdrawal the funds through the return of the loan granted by the shareholder. It is necessary to formalize the loan granted by means of a loan agreement.

Determination of tax due should be monthly

In any of these three modalities (profits sharing, capital decrease, refunding a granted loan), the shareholder residing in Brazil may be taxed, and the tax calculation and its payment must be monthly made.

The tax due incidence and its rate will depend on the modality in which the shareholder used the resources, as already mentioned, and on the combination of other factors that should be considered.

A monthly accounting is essential to avoid fines and penalties

The ideal for the shareholder is to monthly work on the accounting of your offshore company together with your accountant. The monthly analysis of operations can mean a huge savings for shareholders in relation to taxes due on profit sharing, capital decrease, or loan return operations. In all of these transactions, any tax due must be paid by the last working day of the month following the operation, and the payments after deadline are subject to a default fine (0.33% per day, limited to 20%) and interest (Selic rate).

Annual financial statement

The preparation of the annual financial statement is required for those taxpayers in Brazil who wish to be in full compliance with their obligations here. The balance sheet can be made in the country of origin of the offshore company or by a qualified Brazilian accountant and in compliance with international accounting rules (IFRS).

The preparation of a financial statement will allow the shareholder a detailed view of the investments, possible liabilities, capital, retained earnings reserve, profit sharing, etc. Such information is essential to the entries in the annual income tax statements and in the statements of Brazilian capital abroad to the Central Bank of Brazil. Failure to prove the information may result in severe penalties imposed by the RFB and Bacen.

DPC has a specialized team to advise shareholders of offshore companies to fulfill the obligations and determination of taxes, as individuals in Brazil, including the preparation of the company’s accounting and fiscal balance sheet.