The National Congress of Brazil has adopted a law, effective January 1, 2009, that expands the legal definition of "tax havens" in such a way as to include the America State of Delaware within the new definition. Reports indicate that the changes were made specifically so that Delaware, legal home to many thousands of corporations, would be designated as a tax haven.
The Brazilian politicians took aim at a special target, the second smallest state in the United States, home of U.S. Senator Joe Biden, Barack Obama's vice presidential running mate. Delaware will now join the likes of the Cayman Islands, Panama, the British Virgin Islands and Bermuda. A final listing awaits rules to be issued by Brazil's tax collection agency, the Federal Revenue Service (SRF).
Tax Punishment
Under Brazilian law, corporations or other legal entities that dare to register in any jurisdiction Brazil designates as a "tax haven" will be punish by much higher taxes. The new law means there will be a dramatic impact on the tax rates Brazil levies on payments made to persons or companies located in Delaware.
Interest and royalty payments, and payments for service fees to companies or persons located in Delaware will be subject to 25% withholding tax rather than the general 15% rate others enjoy. Capital gains taxes applicable to the sale of the shares of Brazilian companies by legal entities registered in Delaware will also be increased. Payments made to non-related parties located in Delaware will be treated as if they were payments made to related parties, and subject to much higher tax rates as well.
Financial Privacy a Target
Prior to this new law Brazil defined "tax havens" as jurisdictions that did not tax income at all, or taxed it at a maximum rate of up to 20%. The new law goes well beyond the issue of low taxes per se. It is a frontal attack on financial privacy laws by expanding the definition to include jurisdictions that do not permit access to information about a legal entity's shareholders, members or partners, how much equity they own, or the identity of its nonresident beneficial owners. Mandatory listing of beneficial owners has been a shrill demand of the global political Left for many years.
This new law is a blatant Leftist political attempt to punish jurisdictions, and the persons who use them, if a jurisdiction doesn't require and permit access to a registry of the shareholders. This sort of tax attack goes well beyond the phony blacklists of the Organization for Economic and Community Development (OECD) aimed at what the high tax bureaucrats disingenuously called "unfair tax competition" -- which the OECD defines as low or no taxes.
Tax Hungry Leftists
Locals suggest that the reason for this high-tax attack by Brazil is the increasing popularity among Brazilian business persons who use Delaware limited liability companies (LLCs) as partners and equity holders of Brazilian companies and investment funds. It appears that the FRS taxocrats think that Brazilian investors and investment funds are using Delaware LLCs to conceal their identity and avoid paying taxes.
Of course this punitive course by tax hungry Brazil may turn out to be futile and meaningless at best. No doubt Brazilian business people are smart enough to find other jurisdictions, (perhaps even Nevada or Wyoming), that don't meet the expanded definition -- or simply to move their business elsewhere in the global economy.
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